ECS3703
Study Notes
Revision PACK
Exam Notes & Memo
,ECS3703
Study Notes
Revision PACK
Exam Notes & Memo
, ECS3703 - INTERNATIONAL FINANCE – S1 - 2015
1 THE BALANCE OF PAYMENTS 6 OPEN ECONOMY MACROECONOMICS: ADJUSTMENT POLICIES
1.1 Introduction 6.1 Introduction
1.2 What is the balance of payments? 6.2 Internal and external balance with expenditure-changing and
1.3 The South African balance of payments expenditure switching policies: the Swan analysis
1.4 The significance of imbalances in the balance of payments 6.3 Equilibrium in the goods market, in the money market and in
the balance of payments
2 FOREIGN EXCHANGE MARKETS AND EXCHANGE RATES 6.4 Fiscal and monetary policies for internal and external
2.1 Introduction balance with fixed exchange rates
2.2 Functions of the foreign exchange markets 6.5 The IS-LM-BP model with flexible exchange rates
2.3 Foreign exchange rates 6.6 Policy mix and price changes
2.4 Spot and forward rates, currency swaps, futures and options 6.7 Direct controls
2.5 Foreign exchange risks, hedging and speculation
2.6 Interest arbitrage and the efficiency of foreign exchange 7 PRICES AND OUTPUT IN AN OPEN ECONOMY: AGGREGATE
markets DEMANDAND AGGREGATE SUPPLY
2.7 Eurocurrency or offshore financial markets 7.1 Introduction
7.2 Aggregate demand, aggregate supply and equilibrium in a
3 EXCHANGE RATE DETERMINATION closed economy
3.1 Introduction 7.3 Aggregate demand in an open economy under fixed and
3.2 Purchasing power parity theory flexible exchange rates
3.3 Monetary approach to the balance of payments and exchange 7.4 The effect of economic shocks and macroeconomic policies
rates on aggregate demand in open economies with flexible prices
3.4 Portfolio balance model and exchange rates 7.5 The effect of fiscal and monetary policies in open economies
3.5 Exchange rate dynamics with flexible prices
3.6 Empirical tests of the monetary and portfolio balance models 7.6 Macroeconomic policies to stimulate growth and adjust to
and exchange rate forecasting. supply shocks
4 THE PRICE ADJUSTMENT MECHANISM WITH FLEXIBLE AND 8 FLEXIBLE VERSUS FIXED EXCHANGE RATES, THE
FIXEDEXCHANGE RATES EUROPEANMONETARY SYSTEM AND MACROECONOMIC POLICY
4.1 Introduction COORDINATION
4.2 Adjustment with flexible exchange rates 8.1 Introduction
4.3 The effect of exchange rate changes on domestic prices and 8.2 The case for flexible exchange rates
the terms of trade 8.3 The case for fixed exchange rates
4.4 Stability of foreign exchange markets 8.4 Optimum currency areas, the European monetary system
4.5 Elasticities in the real world and the European monetary union
4.6 Adjustment under the gold standard 8.5 Currency boards arrangements and dollarisation
8.6 Exchange rate bands, adjustable pegs, crawling pegs and
5 THE INCOME ADJUSTMENT MECHANISM AND SYNTHESIS OF managed floating
AUTOMATIC ADJUSTMENTS 8.7 International macroeconomic policy coordination
5.1 Introduction
5.2 Income determination in a closed economy 9 THE INTERNATIONAL MONETARY SYSTEM: PAST, PRESENT AND
5.3 Income determination in a small open economy FUTURE
5.4 Foreign repercussions 9.1 Introduction
5.5 The absorption approach 9.2 The gold standard and the interwar experience
5.6 Monetary adjustments and synthesis of the automatic 9.3 The Bretton Woods system
adjustments 9.4 Operation and evolution of the Bretton Woods system
9.5 US balance of payments deficits and collapse of the Bretton
Woods system
9.6 The international monetary system: present and future
9.7 Exchange rate policy and management in South Africa
H.Crassas – 2014 – MNG3701 Page 1
, ECS3703 - INTERNATIONAL FINANCE
STUDY UNIT 1 – THE BALANCE OF PAYMENTS
1.1 INTRODUCTION
This study unit reviews the terminology and interpretation of a country’s balance of payments, as set out in the prescribed
book. Because the discussion there is mostly descriptive, it is not necessary to repeat in different words what is described
there. Note that this supplementary reading is included for examination purposes.
1.2 WHAT IS THE BALANCE OF PAYMENTS?
The balance of payments is an accounting summary or statement of the various transactions that have taken place between a
country and its trading partners over a period of time, usually a year. Such transactions are normally aggregated according to
the type of exchanges that have occurred – for example, whether the transaction represents a trade in goods, services or an
exchange of financial assets or claims. However, other aggregations are also possible, along, say, geographic lines.
We should guard against confusing the balance of payments with the concept of a national balance sheet.
• A national balance sheet is a summary- aggregated statement of a country’s assets and liabilities, which is similar to a
firm’s balance sheet.
• The balance of payments is more like a company income statement than a balance sheet. It is a record of the monetary
values of the various flows of goods, services and financial assets between countries rather than a measure of the
existing national stocks thereof.
The two measures are related – just as the flow of water from a tap will alter the level (stock) of water in a bath so, for
example, the net flows of foreign exchange resulting from international transactions lead to a change in a country’s stock of
foreign exchange reserves.
1.3 THE SOUTH AFRICAN BALANCE OF PAYMENTS
Three main divisions are usually present:
1. The current account,
2. The capital or financial account and
3. The change in official net foreign exchange reserves.
H.Crassas – 2014 – MNG3701 Page 2
Study Notes
Revision PACK
Exam Notes & Memo
,ECS3703
Study Notes
Revision PACK
Exam Notes & Memo
, ECS3703 - INTERNATIONAL FINANCE – S1 - 2015
1 THE BALANCE OF PAYMENTS 6 OPEN ECONOMY MACROECONOMICS: ADJUSTMENT POLICIES
1.1 Introduction 6.1 Introduction
1.2 What is the balance of payments? 6.2 Internal and external balance with expenditure-changing and
1.3 The South African balance of payments expenditure switching policies: the Swan analysis
1.4 The significance of imbalances in the balance of payments 6.3 Equilibrium in the goods market, in the money market and in
the balance of payments
2 FOREIGN EXCHANGE MARKETS AND EXCHANGE RATES 6.4 Fiscal and monetary policies for internal and external
2.1 Introduction balance with fixed exchange rates
2.2 Functions of the foreign exchange markets 6.5 The IS-LM-BP model with flexible exchange rates
2.3 Foreign exchange rates 6.6 Policy mix and price changes
2.4 Spot and forward rates, currency swaps, futures and options 6.7 Direct controls
2.5 Foreign exchange risks, hedging and speculation
2.6 Interest arbitrage and the efficiency of foreign exchange 7 PRICES AND OUTPUT IN AN OPEN ECONOMY: AGGREGATE
markets DEMANDAND AGGREGATE SUPPLY
2.7 Eurocurrency or offshore financial markets 7.1 Introduction
7.2 Aggregate demand, aggregate supply and equilibrium in a
3 EXCHANGE RATE DETERMINATION closed economy
3.1 Introduction 7.3 Aggregate demand in an open economy under fixed and
3.2 Purchasing power parity theory flexible exchange rates
3.3 Monetary approach to the balance of payments and exchange 7.4 The effect of economic shocks and macroeconomic policies
rates on aggregate demand in open economies with flexible prices
3.4 Portfolio balance model and exchange rates 7.5 The effect of fiscal and monetary policies in open economies
3.5 Exchange rate dynamics with flexible prices
3.6 Empirical tests of the monetary and portfolio balance models 7.6 Macroeconomic policies to stimulate growth and adjust to
and exchange rate forecasting. supply shocks
4 THE PRICE ADJUSTMENT MECHANISM WITH FLEXIBLE AND 8 FLEXIBLE VERSUS FIXED EXCHANGE RATES, THE
FIXEDEXCHANGE RATES EUROPEANMONETARY SYSTEM AND MACROECONOMIC POLICY
4.1 Introduction COORDINATION
4.2 Adjustment with flexible exchange rates 8.1 Introduction
4.3 The effect of exchange rate changes on domestic prices and 8.2 The case for flexible exchange rates
the terms of trade 8.3 The case for fixed exchange rates
4.4 Stability of foreign exchange markets 8.4 Optimum currency areas, the European monetary system
4.5 Elasticities in the real world and the European monetary union
4.6 Adjustment under the gold standard 8.5 Currency boards arrangements and dollarisation
8.6 Exchange rate bands, adjustable pegs, crawling pegs and
5 THE INCOME ADJUSTMENT MECHANISM AND SYNTHESIS OF managed floating
AUTOMATIC ADJUSTMENTS 8.7 International macroeconomic policy coordination
5.1 Introduction
5.2 Income determination in a closed economy 9 THE INTERNATIONAL MONETARY SYSTEM: PAST, PRESENT AND
5.3 Income determination in a small open economy FUTURE
5.4 Foreign repercussions 9.1 Introduction
5.5 The absorption approach 9.2 The gold standard and the interwar experience
5.6 Monetary adjustments and synthesis of the automatic 9.3 The Bretton Woods system
adjustments 9.4 Operation and evolution of the Bretton Woods system
9.5 US balance of payments deficits and collapse of the Bretton
Woods system
9.6 The international monetary system: present and future
9.7 Exchange rate policy and management in South Africa
H.Crassas – 2014 – MNG3701 Page 1
, ECS3703 - INTERNATIONAL FINANCE
STUDY UNIT 1 – THE BALANCE OF PAYMENTS
1.1 INTRODUCTION
This study unit reviews the terminology and interpretation of a country’s balance of payments, as set out in the prescribed
book. Because the discussion there is mostly descriptive, it is not necessary to repeat in different words what is described
there. Note that this supplementary reading is included for examination purposes.
1.2 WHAT IS THE BALANCE OF PAYMENTS?
The balance of payments is an accounting summary or statement of the various transactions that have taken place between a
country and its trading partners over a period of time, usually a year. Such transactions are normally aggregated according to
the type of exchanges that have occurred – for example, whether the transaction represents a trade in goods, services or an
exchange of financial assets or claims. However, other aggregations are also possible, along, say, geographic lines.
We should guard against confusing the balance of payments with the concept of a national balance sheet.
• A national balance sheet is a summary- aggregated statement of a country’s assets and liabilities, which is similar to a
firm’s balance sheet.
• The balance of payments is more like a company income statement than a balance sheet. It is a record of the monetary
values of the various flows of goods, services and financial assets between countries rather than a measure of the
existing national stocks thereof.
The two measures are related – just as the flow of water from a tap will alter the level (stock) of water in a bath so, for
example, the net flows of foreign exchange resulting from international transactions lead to a change in a country’s stock of
foreign exchange reserves.
1.3 THE SOUTH AFRICAN BALANCE OF PAYMENTS
Three main divisions are usually present:
1. The current account,
2. The capital or financial account and
3. The change in official net foreign exchange reserves.
H.Crassas – 2014 – MNG3701 Page 2
