Assignment #3

Our previous assignments considered overall measures of growth and distribution,

and processes of transform,ation within a country. This assignment addresses external
influences. It is broken into two parts, one that deals with international trade and one that
deals with the balance of payments and international debt.
I.

Our first goal is to characterize the nature of the countrys trade in specific
commodities. The United Nations Statistics Division reports that information in
two forms. One is in printed form in the International Trade Statistics Yearbook.
The library has those volumes for early years, if you want to trace the evolution of
different goods being traded over time, as we did for Malaysia and China in class.
The most recent years are available on line in pdf form at http://comtrade.un.org.
Select the Analytical Tables and then choose the Country Tables and select your
country. On each country page the first two tables show the countrys total
exports and imports to its individual trading partners. The next two tables show
the countrys exports and imports broken down y individual product categories.
For example, in the first set of tables you can calculate what share of Mexican
trade is with Guatemala or the United States, while in the second set of tables you
can see Mexican oil exports relative to its total exports.
To determine which goods are a countrys most important imports or exports can
be sort of tedious looking down the columns of the latter two tables. The UN
provides a data base that you can use to extract trade information and then
manipulate it in excel. At the web site above, just pick Database instead of
Analytical Tables. (See the handout on instructions for using this database if the
interface does not seem straightforward to you.) Once you have the data in excel,
you can sort on the column that gives the value of exports to find those that are
most important. The bigger advantage of this database is that you can look at
trade by commodity for individual countries. If I want to know how much
Chinese cloth is used to make clothes in Lesotho that are exported to the United
States, this is a good source for addressing that question.
In some cases we can characterize a product on the basis of the factor inputs it
uses intensively. For example, is the good labor intensive or natural resource
intensive? In other cases, that characterization is more difficult, because of the
outsourcing of some parts of the production process to other countries. The final
assembled product may involve inputs from several countries and not simply
depend upon the factor endowments or technical capability of the country where
the final stage of production occurs. In spite of those complications, you still may
find it useful to indicate something about the countrys pattern of trade based on
the factor intensity table (Table 4.2) posted in the documents section of our course
web page.
Table 4.2 is based on U.S. production statistics. The first column shows employee
compensation as a share of value added in that industry; the rest of value added

must be attributable to land, capital, or other natural resources. The second

column gives employee compensation divided by the number of full time
workers. A large number here generally implies a higher level of human capital
per worker, while a lower number implies more workers in the industry are
unskilled. Note the lower relative wages in textiles, apparel, and wood.
If you are wondering about the relative factor endowment of your country, Table
4.1 on the web page gives that information for some countries for 1992; I can let
you know if the author has information on your country. The link provided there
gives data for prior years and for other countries.
For this section of your paper, explain what products are most important in the
countrys international trade.
1. Does it rely on primary export products (agriculture and crude materials,
like petroleum) or on manufactures?
2. Are its manufactures concentrated in unskilled-labor intensive goods?
3. Is it highly dependent on just a few product categories, or is it diversified
across many different goods?
4. Have those patterns changed over time?
5. Do its trade partners change over time, perhaps due to changing relative
factor endowments, but perhaps due to the creation of preferential trade
blocs?
6. With respect to imports, does it import primarily capital goods and
machinery, as we might expect for a country building up its capital stock?
7. Is it quite reliant on imported energy and other raw materials?
In the next section of your paper, you may want to note how the country will be
affected by an oil price shock or a commodity price shock, so what you observe at
this point may be helpful in part II. Also, if you consider the primary product
price trends reported at the data source you use in part II, you may be able to
judge whether your country faces the problem identified by Prebisch, a high
dependence on primary products whose prices were falling over time (or at least
not rising as fast as the manufactured goods that it imported).
II.

The second part of this assignment requires you to consider your countrys
balance of payments position and the potential for it to suffer a debt crisis. A basic
building block for us will be the IMFs compilation of its balance of payments in
International Financial Statistics. You can access this information from the
Grinnell College library web page. Because these data are not freely available but
by subscription only, dont go directly to the IMF web page. See the handout for
instructions on accessing these data, both country specific macro data and
commodity price trends that may be relevant to your country. We will also use
some supplemental information from the WDI source that you have previously

used, especially where the bank summarizes balance of payments information or

external debt information.
As a brief summary of our class discussion of the balance of payments, recall the
possible implications from the various entries recorded.
Goods trade (merchandise trade, easiest to count; a surplus represents a + in the
balance of payments, creates a demand for that countrys currency)
Services trade (call centers, tourism, transportation, financial, and business
services)
Income (net earnings from investment abroad by a countrys residents or the labor
income they earn abroad note this may include some of what is labeled as
remittances, but most of that category shows up below)
Transfers (receipt of foreign aid or gifts from private individuals who live abroad
an individual who remains abroad but makes a gift to family back in the
home country will be included in remittances.)
Current Account Balance the sum of the four items above. A current account
surplus indicates a country that produces more than it spends, and the
resultant savings allow it to acquire foreign assets. For countries with a
deficit, the WDI report of the CA/GDP percentage is a good indicator of the
extent to which they depend upon foreign saving to finance investment
within the country.
Foreign direct investment Management control of the foreign assets that are
acquired, an entry where investment by multinational corporations shows up,
an item that is not as likely to be reversed if the country faces a crisis. An
inflow of FDI represents a + in the balance of payments.
Portfolio investment Sales of shares of stock or bonds to foreign buyers show up
as a +. Implies the existence of organized financial markets.
Other investment Receipt of loans or deposits from foreigners, credit granted to
those who import goods into this country
Financial Account Balance The sum of the three entries above. An indication of
how trade is financed, the types of foreign assets acquired by residents if the
country has a current account surplus.
Net Errors and Omissions A fudge factor to ensure that all of the entries in the
table, + and -, add to zero.
Overall Balance the sum of all the items listed above. This includes all
transactions except the activity of the central bank in buying and selling
foreign reserves
Reserve Assets the Central Banks purchase of foreign reserves shows up as a
entry, the sale as a + entry. A country with an Overall Balance surplus ends
up buying foreign exchange to keep its currency from rising in value. If it
sells foreign exchange, it is defending the value of its currency and trying to
limit a decline in its value.
Use of Fund Credit Central Bank borrowing from the International Monetary
Fund shows up as a +, while repayment shows up as a -.

Exceptional Financing Default or rescheduling of a countrys debt obligations

shows up as a +
Chapter 14 of the textbook discusses the pros and cons of high flows of FDI,
portfolio investment, foreign aid, and remittances. Therefore, we want the detail
shown above to see how relevant those items are to your countrys experience.
Entries from the World Bank data that have more to do with a potential debt crisis
include the following:
External debt, total (% of GNI)
Public and publicly guaranteed debt service (% of exports)
Public and publicly guaranteed debt service (% of GNI)
Short-term debt (% of exports of goods, services and income)
Short-term debt (% of total external debt)
Short-term debt (% of total reserves)
Total debt service (% of exports of goods, services and income)
Total debt service (% of GNI)
Consumer price index (2000 = 100)
GDP deflator (base year varies by country)
Official exchange rate (LCU per US$, period average)
If debt is high relative to Gross National Income, the country may have difficulty
convincing others to lend it more money or in repaying what it already owes. The
entries above distinguish between what is public debt and what is private debt,
because the latter need not be backed up by the government. In actual crises,
however, many countries have not wanted their private firms to be taken over by
foreign owners, and therefore the private debts have been assumed by the public
sector. When a high proportion of the debt is short term, that means a country is
especially vulnerable to a crisis where foreign lenders refuse to renew loans. A
further indication of the severity of a countrys debt position is its debt service
payments relative to exports or GNI. The payments could be high because the
country owes a lot or because the interest rate it faces is high. The ratio could rise
if export earnings fell sharply and the country had less foreign exchange available
to service its debts. The final entries for price indexes and the exchange rate
allow us to see whether inflation is making the countrys goods less competitive
in world markets or whether the exchange rate is depreciating to offset that effect.
For this section of your paper, consider the following sorts of questions
(1) Does your country import more than it exports? Do its export earnings appear to
be quite volatile, as we predict could be that case for those reliant on primary
product exports? Are its imports quite volatile, perhaps a reflection of high oil
prices or of big changes in its domestic income? If its balance of trade on goods is

(2)

(3)

(4)

(5)

negative, does that also result in a deficit on the current account as a whole, or are
there other entries that provide an important offset to that deficit? For most
countries, a CA/GDP deficit greater than 4% or 5% in absolute value is unlikely
to be sustainable in the long run. By that standard, did your country appear to
need to reduce its deficit during this period?
What allows the country to run a current account deficit? That is, how does the
country finance that extra spending does it sell assets to foreigners or borrow
from them? Is the current account a good predictor of the overall balance? If so,
there may be little variation in the financial account from year to year, possibly
because the World Bank lends a set amount of money and few other lenders are
attracted to that country.
How much does the Central Bank intervene in the foreign exchange market to
defend the value of its currency in the case of a deficit or keep its currency from
rising in the case of a surplus? When you look at the value of the currency over
time, has it changed much in value relative to the US dollar? Did your country
face a crisis when it had to borrow from the IMF? Did it rely on Exceptional
Financing to deal with a debt crisis?
Is your country heavily indebted? In establishing an initiative to deal with highlyindebted poor countries, the World Bank set a target that debt should not exceed
150% of export earnings. In terms of a related measure, how great a burden are
debt service payments, and how has that ratio changed over time?
What share of the debt of your country is short term? If your country faced a
period of financial crisis, how did that figure change? Were there large swings in
the amount of capital that flowed into the country and then out of the country?
Can you distinguish between foreigners taking their money out (as in the entries
for Other Investment Liabilities) or domestic residents moving money abroad (as
in Other Investment Assets)? As above, you might identify such a period by years
in which the country borrowed from the IMF.