This article presents an approach to payments the ory which. The paper seeks to assess the impact of adjustment reforms on sudan. The study used the bound testing approach to show the relationship that exists among monetary policy variables money supply, domestic credit, inflation and exchange rate, output growth, and trade balance and bop adjustment in nigeria. Some of the modern theory of balance of payment adjustment of a country are listed below. Refresher on balance of payments accounts, analysis. Their export may remain constant or decline causing disequilibrium in the balance of payments. Global monetarism and the monetary approach to the balance of. Ordinary least squares method was employed in this study to establish the impact of identified explanatory. These approaches include the elasticity approach, the absorption approach and the monetary approach. The rebirth of the view that the balance of payment bop is a monetary phenomenon has led to an avalanche of new literature. This insight is the startingpoint of the absorption approach to the balance of payments which was originally developed by alexander 1952 and subsequently elaborated on by johnson 1958, though. Global monetarism and the monetary approach to the balance.
Accordingly, any observed disequilibrium in a countrys balance of payment can, ceteris paribus, be adroitly corrected via. Balanceofpayments theory and the united kingdom experience pp 77102 cite as. The classical approach to bop adjustment contained no analysis, however, of the effect of exchange rate changes as a substitute in a fixedprice world for flexible domestic prices, which was more relevant to the period after 1931 when the gold standard collapsed as a system of international payments. Elasticity approach to the balance of payment current account. Under the assumption of rational expectations, the model yields an expres sion for the current real exchange rate as a. The elasticity approach is helpful in understanding the different outcomes that might arise from the short to long run.
As indicated in the last chapter the elasticity approach to the analysis of balanceofpayments adjustment based on the marshalllerner condition rests on several restrictive assumptions. Assume that the capital account of the balance of payments is given by the function. The main purpose of this study was to investigate the determinants of bop dynamics in zimbabwe between 1981 and 2012, using time series data. Price elasticity demand curve foreign currency import price domestic currency. Natural calamities such as the failure of rains or the coming floods may easily cause disequilibrium in the balance of payments by adversely affecting agriculture and industrial production in the country. Krueger, balanceofpayments theory, the journal of economic literature march 1969, pp. Their preoccupation has led to new approaches to monetary analysis. It is, therefore, also known as the keynesian approach. The balance of payments and the exchange rate in todays global economy world, the phenomenon of the closed economy one that is unaffected by international trade and capital flows is little more than an abstract textbook concept. Exchange rate volatility and balance of payments problem. Impact of exchange rate on balance of payment in nigeria.
The weaknesses of the elasticity approach to balanceofpayments adjustment can be summed up by saying that it is. Daniels and vanhoose elasticity approach 2 overview of the elasticity approach the elasticity approach emphasizes price changes as a determinant of a nations balance of payments and exchange rate. Pdf the absorption approach to the balance of payments. Impact of exchange rate on balance of payment in nigeria pp. Asset markets, exchange rates and the balance of payments nber. Crockett 10 sees the elasticity approach to balance of payments as the most efficient mechanism of balance of payments adjustments and suggests the computation of demand elasticity as the analytical tool by which policies in the exchange field can be chosen, so as to form the equilibrium.
Price and income elasticities of export and import and. Kemp 1 for a lucid analysis of the current state of payments theory, see anne 0. Mechanism of the monetary approach to the balance of. Mechanism of the elasticity approach to the balance of. Analysis of bop is essentially a postwar phenomenon. Lecture 3 elasticity and absorption to bop lecture 3.
Oct 20, 2016 income and money supply are included in the model in order to examine the absorption and monetary approaches to the balance of payment trade balance besides the conventional approach of elasticity, using exchange rate. In this lecture, we investigate the relationship between the exchange rate and the balance of payments. Balance of payments adjustment and developing countries odi. The elasticity approach to the balance of payments. Grade 11 economics textbook for ethiopian students pdf download. The elasticities approach to egypts balance of payments and. Introduction to the balance of payments the balance of payments is the record of a countrys transactions with the rest of the world. Top 3 approaches of balance of payments micro economics notes. The empirical analysis of monetary policy on balance of.
If the trade balance is derived from an elasticities approach the country has some monopoly. Mechanism of absorption approach to the balance of. This paper will present the two most important approaches in this field. Mechanism of absorption approach to the balance of payments. A test of marshalllerner hypothesis article pdf available in research journal of business management 25a. The weaknesses of the elasticity approach to balance of payments adjustment can be summed up by saying that it is partialequilibrium analysis. Balance of payments adjustment and developing countries. The balance of payment problem in developing countries, especially in pakistan 36 surplus and deficit in balance of payment any payment to foreigners is a deficit item in bop while any receipt from foreigners is a surplus item in bop. The classic elasticity approach to balance of payments adjustment can be illustrated in figure 1, the market for dollars diagram. Introduction theories of bop are concerned with identifying possible determinants of bop, and specifically analysis of policies for preserving bop equilibrium. The balance of payment is defined as a systematic record of economic and financial transactions for a given period of time, say one year, between residents of an economy and nonresidents and the rest of the world sloman, 2004. Pdf as indicated in the last chapter the elasticity approach to the. The effect of exchange rate movements on trade balance.
Another aspect of elasticity approach to balance of payment exchange rate relationship is the marshalllerner ml condition marshall, 1923, lerner, 1944. Adjustment policies and the current account balance. The recent literature on the monetary approach to the balance of payment is especially important for the policy analysis in small open economies like the west african monetary zone wamz countries12. It runs through the income effect of devaluation as against the price effect to. It explains changes in balance of payments in terms of the demand for and supply of money. Money, balanceofpayments theory, and the international monetary problem. Balance of payments bop of a country is a systematic summary statement of a. Elasticity approach an overview sciencedirect topics. The balance of aitnents is usually divided into the current account and the capital account, trith the latter veinp subdivided into long term and short term accounts.
Chapter 11 the monetary approach to the balance of payments. Although the part played by income changes in bop adjustment is keynesian in approach and method, keynes himself took. Pdf analysis of balance of payments trend in nigeria. Pdf the elasticity approach to the balance of payments. Among these three approaches, the monetary approach describes the current state of art in the analysis of impact of exchange rate on balance of payment in nigeria. Grade 11 economics textbook for ethiopian students pdf. Balanceofpayments and exchangerate determination overview of the elasticity approach the elasticity approach emphasizes price changes as a determinant of a nations balance of payments and exchange rate. The paper derives and estimates a current account model from the perspective that the current account balance is the difference between national savings and investment.
The elasticity approach which identifies the exchange rate as a major determinant of the trade balance and the devaluation policy as instrument to cope with trade deficit. Mechanism of the monetary approach to the balance of payments adjustment. The elasticities approach to egypts balance of payments. The fifth edition of the balance of payments manual the manual continues the series of international standards that have been issued by the international monetary fund imf for providing guidance to member countries in the compilation of balance of payments and related data on the international investment position. An overview of the monetary approach to balance of payments the monetary approach is essentially a product of work conducted in the late 1950s, the 1960s and early 1970s, by the international monetary funds research department under jacques j. Marshalllerner condition the elasticity approach to bop is associated with the marshalllerner condition which was worked out independently by these two economists. This paper evaluates the current state of the literature concerning the effects of exchange rate movements on trade balance. Notes on the elasticities approach to bop adjustment see also alternative adjustment strategies here and at the end of this file. The elasticity approach tries to predict the outcome policy changes will have on the balance of payments. Elasticity approach to the balance of payment free download as pdf file. The elasticity approach to the balance of payments assumption supply elasticity for the domestic export good and foreign import good are perfectly elastic, so that changes in demand volumes have no effect on prices. Practical application of the estimated income elasticity of import in the thirlwalls economic growth model shows that the growth rate of the macedonian economy is determined largely by balance of payment constrains, or it depends on export growth rate and significantly is reduced by high income elasticity of import. The two monetary approaches to the balance of payments.
A monetary view of the balance of payments donald s. The traditional approach to the effects of devaluation on trade balance runs in terms of elasticites. Elasticity, absorption, keynesian multiplier, keynesian. The imf approach is presented as an evolutionary development of the kahnkeynes multiplier model in an open economy. Balance of payment components capital account transactions current account transactions official reserves account unilateral transactions. From the theoretical viewpoint there are, at least, three different approaches to a countrys balance payment. Munich personal repec archive the elasticities approach to egypts balance of payments and equilibrium exchange rate lord, montague j. The above implies domestic and foreign prices are fixed so that changes in relative prices are caused by changes in the nominal exchange rate. Balance of payments stabilisation policy in developing. With concern regarding unemployment giving way to concern over inflation, the keynesian methodological approach came to be supplemented by the tools of monetary analysis, and hencewe see a revival ofinterest in the monetary approach to the balance of payments. Balance of payment balance of payments economic equilibrium. This study investigates the impact of monetary policy on balance of payments bop adjustment in nigeria within the periods, 19802015. The value of a countrys currency depends on the overall economy of the country.
Balance of payments adjustment and developing countries tony killick it has seemed to this writer for some time that the terms balance of payments adjustment and the costs of such adjustment have come to be used in a very loose and sometimes distorted fashion. Mechanism of the elasticity approach to the balance of payment adjustment. The weaknesses of the elasticity approach to balanceofpayments adjustment can be summed up by saying that it is partialequilibrium analysis. For example, this approach illustrates how exchange rates will. Elasticity measures the sensitivity or responsiveness of these changes definition elasticity measures the change in one variable in response to a change in another variable we look at. The concept of balance of payments is very important from the point of view of a country because it is the reflection of the fact that whether the country keeps enough funds to pay for its imports. The concept of balance of payments is very important from the point of view of a country because it is the reflection of the fact that whether the. Ch08 the elasticity approach to balanceofpayments and. This is particularly surprising in view of the essentially monetary nature of payments theory. The notion of a closed economy is nevertheless quite. In this period, a gradual evolution of a third major approach called the monetary approach to the balance of payments took place. Different theories tend to focus on different cortnonents of the balance of payments. The essence of this elasticities approach in contained in the so called marshallerner condition which states that the sum of the elasticities of demand for a countrys exports and its demand for imports has to be greater than unity if.
This paper constitutes a chapter of a project entitled the itif. Mechanism of absorption approach to the balance of payments adjustment. The absorption approach to the balance of payments. Disequilibrium in the balance of payment meaning, causes. Chapter 11 the monetary approach to the balance of.
As indicated in the last chapter the elasticity approach to the analysis of balance of payments adjustment based on the marshalllerner condition rests on several restrictive assumptions. But if thereare two relative prices, there should be crosseffects in demand. The elasticities approach, for example, focusoes on the current account, where. Equating balance of trade with goods balance alone is to ignore the importance of service balance as a factor determining national income. The monetary approach to the balance of payments is an explanation of the overall balance of payments. If debit on current account is greater than the credit.
The inclusion of budget balance is purposely to examine the existence twin deficit hypothesis in the ethiopian context. Lecture 3 elasticity and absorption approaches to the balance of payments 1 introduction in the opening two lectures we have introduced the exchange rate and the balance of payments. In grade 11, economics is one of the most important subjects in the social sciences stream. It runs through the income effect of devaluation as against the price effect to the elasticity approach. As indicated in the last chapter the elasticity approach to the analysis of balanceofpayments adjustment based on the marshalllerner condition rests on. The elasticity approach to the balance of payments springerlink. In its simplest form, the elasticity approach focuses on the current account of the balance of payments and is concerned with the condition under which exchange rate. The keynesian multiplier approach makes good the deficiency of the simple elasticity approach by recognizing and allowing for the implications of changes in expenditure on output, income, expenditure, and again output for balanceofpayments equilibrium.
The absorption approach to balance of payments is general equilibrium in nature and is based on the keynesian national income relationships. Chapter 12 the balance of payments and the exchange rate. Global monetarism and the monetary approach to the balance of payment brookings papers on economic activity, 1975, no. The absorption approach to the balance of trade is a theory that emphasizes how domestic spending on domestic goods changes relative to domestic output. The imf approach is presented as an evolutionary development of the kahn keynes multiplier model in an open economy. This includes manufacturing, foreign investments, employment, trade balance. Income and money supply are included in the model in order to examine the absorption and monetary approaches to the balance of payment trade balance besides the conventional approach of elasticity, using exchange rate. In other words, the balance of trade is viewed as the difference between what the economy produces and what it takes, or absorbs, for domestic use. Monetary policy and balance of payments stability in nigeria.