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Sem 5 Prep
← Open Economy MacroReading a BoP statement and the investment position

Formulas for this chapter

Annualising quarterly data

Annual = Q1 + Q2 + Q3 + Q4 NEVER: Annual = any single quarter x 4

Whenever a question gives quarterly external data. If only one quarter is available, compare it with the same quarter of the previous year instead of scaling it.

Q1 to Q4
The four quarterly figures, added, not averaged and not extrapolated
Seasonality
The share of the year falling in one quarter; above 25 % means annualising that quarter overstates the year

Reserve import cover

Import cover (months) = reserves / (annual imports / 12)

Judging whether reserves are adequate to finance a deficit while an adjustment is arranged. Convert annual imports to a monthly figure first.

Reserves
Official reserve assets: gold, SDRs, the IMF reserve position and foreign currency holdings
Monthly imports
Annual imports divided by twelve, or the reported monthly bill

Net investment income from the investment position

Net income = (assets abroad x rate earned) - (foreign assets at home x rate paid)

Projecting next year's factor income line from this year's stock. Never apply a single rate to the net position; the two sides earn different rates.

Assets abroad
The nation's holdings of foreign assets, a stock at year end
Foreign assets at home
Foreign-owned holdings inside the nation, a stock at year end
Step 3 of 22
The real wordsTheory

Warning two: transactions are interrelated

International transactions are closely interrelated rather than independent, so a policy aimed at one line moves several others.

The slide's own example: cutting foreign aid programmes also reduces the recipients' ability to import the donor's goods, so the improvement in the donor's balance of payments may be much less than the reduction in aid.

You cannot pull one thread out of a woven cloth and expect the rest to stay put.

The risk if ignored, from the note: overestimating the improvement by treating flows as independent.

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