Macro Economics: Balance of Payment and Exchange Rates

MACRO ECONOMICS
Balance of Payment and

Exchange Rates
Prepared by: Eric Rodel R. Dallo, MBA

“ Every man lives by
exchanging.”
— Adam Smith
Learning Objectives
● Understand the arguments for free trade, the role of the WTO and GATS
● Understand the Balance of Payments accounts
● Analyse the contribution of the sector to Net Export Earnings
● Describe and explain comparative data for Balance of Payments accounts
● Understand the significance of Exchange Rates to recreation, leisure and
tourism organizations
● Distinguish between Spot and Forward Rates of Exchange
● Analyze Exchange Rate Movements
● Understand government and EC policy in
trade international payments

David Ricardo
Classical Economist who

promoted the idea of
comparative advantage as the
basis for trade.
The Father of Modern Economics
He focused on describing the benefits of
one type of specializing in labor, division
of labor, which is when cooperating
individuals perform specialized tasks.
Addressed specialization on a global,
macroeconomic level to explain Specialize and
Trade based on the concept of Opportunity Cost.
David Ricardo
Opportunity cost
the cost of the next best alternative, or what you
are giving up to do what you are currently doing.
Specialization
is when a nation or individual concentrates its

productive efforts on producing a limited
variety of goods.
It oftentimes has to forgo producing other

goods and relies on obtaining those other
goods through trade.
COMPARATIVE
ADVANTAGE
an economic term referring to an economy's ability to produce goods and

services at a lower opportunity cost than that of trade partners.
It provides a company the ability to sell goods and services at a lower
price than its competitors and realize stronger sales margins.
ABSOLUTE
ADVANTAGE
an economic term referring to an economy's ability to produce goods and

services:
- of a greater total for the same quantity of inputs.

- with fewer resources are needed to produce the same amount of goods and there
will be lower costs than other economies..
BENEFITS from SPECIALIZATION and TRADE
increase productivity and standard of
living within a nation.
there will be a larger global output of
goods and services.
.
Once countries specialize their production

in particular area, additional benefits of
economies of scale are likely to arise
Everyone can benefit from trading with one
another. They can enjoy a greater quantity
and greater variety of goods and services.
So….if economists all agree that free trade is
such a great idea, why do so many people
have problems with the idea?

Domestic jobs are lost.
COST OF
SPECIALIZATION Domestic income is lost.
AND TRADE
National security.
Nations “dumping” goods trying to drive

out domestic competition.
Other nations don’t treat their

workers fairly.
INTERNATIONAL
ORGANIZATIONS
Composed of three main treaty
agreements that summarize the
rules of free trade. These are:
- General Agreement on Tariffs and
Trade (GATT) which covers trade
WTO (World Trade Organization) in goods.
the international agency that - General Agreement on Trade in
promotes free trade. Services (GATS)
which covers trade in services.
- WTO’s intellectual property
Established in 1994 and replaced
agreement which covers trade and
GATT.
investment in ideas and
creativity.
General Agreement on Tariff and Trade World
Trade Organization (GATT ) a legal agreement
between many countries, whose overall
purpose was to promote international trade by
reducing or eliminating trade barriers such as
tariffs or quotas.
Established on January 1948 until 1994 and

was replaced by WTO.
General Agreement on Trade in
Services (GATS )
the treaty that seeks to
operationalize this aim.
Free trade liberalization under WTO is based on three specific pillars:
MARKET ACCESS:
Foreign owned companies have free access to
domestic markets
MOST FAVORED NATION STATUS:
Concessions granted to any one country must be
made available on a non-discriminatory basis to
all other signatories of the agreement
NATIONAL TREATMENT
Foreign investors must be treated on an equal
basis with domestic investors, domestic investors
must not receive any favorable treatment that
could be conceived as protectionist.
LIMITS TO Trade BENEFITS
Extra costs are

Extra costs Transport costs involved in
involved in can add to adopting goods
currency production cost. and services
conversion and for local
risk. markets.
LIMITS TO Trade BENEFITS
Although overall
Most countries there are
Many countries wish to maintain significant gains
seek to protect some balance of to be made from
their home production in key trade, which
markets by strategic goods and particular
protectionist services so as not countries benefit
policies to expose to over- most will depend
dependence on on the terms of
foreign countries trade.
Association of
Southeast Asian Nations
(ASEAN)
Asia-Pacific Economic
Cooperation (APEC)
Brazil, Russia, India,

China, South Africa
(BRICS)
TRADING BLOC European Free Trade
Association (EFTA) – Iceland,
Liechtenstein, Norway and
Switzerland
Organization of Petroleum
Exporting Countries
(OPEC)
Gulf Cooperation Council (GCC)-

Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia, and the United Arab
Emirates
European Union
(EU)
TRADING BLOC

TERMS OF TRADE
Measures the relative prices of what a country
exports in relation to the prices of its imports.
It is expressed by the formula:
the average price of exports ÷

the average price of imports
A persistent argument put forward by

developing countries is that they face
unfavorable terms of trade in comparison with
developed countries.

BALANCE OF PAYMENT (BOP)
BALANCE OF PAYMENT (BOP)
an account It records has four main

which shows inflows(-) components
a country’s and outflows
financial (+) of - a current
transactions currency. - a capital
with the rest - a financial
of the world. account
- net errors &
omissions

measures item which arises
mainly
measures flows because, due to
measures the financial
of capital, for inaccurate data
value of goods transactions collection,
and services example, involving the figures do not
traded, income investments claims on, and always add up as
and transfers liabilities to, they should
non-residents
NET
CURRENT CAPITAL FINANCIAL ERRORS &
ACCOUNT OMISSIONS
BOP COMPONENT
Visibles represents Invisibles represents Income Current Transfers
exports & imports in trade in services or Earned by domestic represent sums to
goods or tangibles intangibles & typically residents from non- approximate the
and typically organized into: residents and vice value of resources
divided into: food, transportation, travel, versa which include given or received
beverages and basic personal, cultural, workers earning and overseas where no
materials recreation investment money has changed
income hands .
1. CURRENT ACCOUNT
mainly measures the value of traded goods and services.
Divided into four parts
BOP COMPONENT AND DIFFERENCE

Capital Transfers Sales of Non- Non-financial
Purchase
produced assets
such as copyrights
2. CAPITAL ACCOUNT
Consist of

Direct Investments Portfolio Other Investments Reserve Assets are
the direct purchase Investments covers trade credits, those foreign
of firms of land or the purchase of loans and deposits. financial assets that
buildings abroad. securities or shares an example, a loan are controlled by the
abroad. to an overseas monetary authorities
company such as the central
bank.
3. FINANCIAL ACCOUNT
records money flows under the following sections:

BOP (Jan – Sep 2019)

BOP (3RD Quarter 2019)
GOVERNMENT POLICY
An acute long-term current account
deficit will require government
intervention.
This may take the form of:
– devaluation or currency
depreciation
– deflation
– protectionism
DEVALUATION OR
CURRENCY DEPRECIATION
a policy of allowing a country’s currency to fall in value or depreciate
under a system of floating exchange rates, or moving to a lower rate
under a fixed exchange rate system.
Aimed to stimulate exports by making foreign currency price cheaper

and to curb imports by increasing the price in the domestic currency
DEFLATION
A policy involves the government to reduce the spending power in the
economy.
The rationale is that, imports form a significant proportion of consumer

expenditure, a reduction in spending power will in turn reduce imports.
Deflation is achieved through increasing interest rates or increasing

taxes. If deflationary policy reduced consumer expenditure, then import
spending would fall
PROTECTIONISM
This entails direct controls on imported goods, including taxes on

imports (tariffs) and limits on import volumes and values (quotas).
The threat of retaliation and the rules of international treaties such as

the EU and GATT (which exists to reduce protectionism) make
protectionism a difficult option.
Leisure and Trade
Foreign currency earnings

from transit tourists
Tourists arriving Boracay

Island, Philippines bringing
foreign currency to spend
NAIA International Airport
BALANCE OF LEISURE and TOURISM PAYMENT
What impact does casinos

have on the Philippines
Balance of payments?
–Initial Investment
–Bills of foreign tourists
–Imports of goods and
services
–Repatriation of profits

BALANCE OF LEISURE and TOURISM PAYMENT
Tourism is an important foreign

currency earner for many countries
What impact has the closure of

Boracay Island had on the
Philippines Balance of Payments?

Tourism a key earner for the
Philippines but expenditure
leaks out of the economy by
allowing foreign brands in
the local to satisfy
international tourist

TOURISM LEAKAGE
The purchase of imported

equipment is an outflow of
currency to the Philippines
current account in goods
(visibles) to satisfy the demands
of international standard and
tourists.

EXCHANGE RATES
CURRENCY
a medium of exchange for trading for goods and services. It is in the form of
paper or coins, usually issued by a government and generally accepted at its
face value as a method of payment.
In the 21st century, a new form of currency was introduced, the virtual
currency. Virtual currencies such as bitcoins have no physical existence or
government backing and are traded and stored in electronic form.

EXCHANGE RATES
Significance of exchange rates:
– How does a rise in a country’s

exchange rate affect leisure and
tourism?
– makes imports cheaper *e.g

clothes, equipment)
– makes exports expensive (e.g.
discourage inbound tourists)

EXCHANGE RATES SYSTEM
1. FLOATING RATING SYSTEM
exchange rate is left free to be determined in the foreign

exchange market by the forces of supply and demand.
In this, Central Bank allows the exchange rate to adjust to

equate to the supply and demand for FOREX
EXCHANGE RATES SYSTEM
2. FIXED RATING SYSTEM
exchange rate is fixed by the Central Bank of the

country
- by official action
- stands ready to buy and sell FOREX at fixed

price over other currency
- Devaluation and Revaluation rest on the

country
DEMAND FOR USD$
(Supply OF Ph Peso)
What factors cause demand for USD$?
– demand for foreign visible exports

–demand for foreign invisible exports
–demand for funds for direct and portfolio investment in dollars
– demand for funds for overseas deposits in dollar accounts
– speculation
– government intervention
SUPPLY OF USD$ (Demand
for Ph Peso)
What factors cause for USD$ to be supplied to the Ph?
– demand for Philippine visible exports

– demand for Philippine invisible exports
– demand for funds for direct and portfolio investment in dollars
– demand for funds for dollar denominated loans
– speculation
– government intervention
SPOT AND FORWARD MARKETS
SPOT MARKET
• the immediate market in foreign currency and represents the current market
rate.
• Payment is made today and the transaction takes place today at today’s rate.
FORWARD MARKET
• exists to satisfy demand for a guaranteed future exchange rate.
• Payment is made today but the transaction is made in the future (e.g. 3 months)
at a rate agreed today

EXCHANGE RATE and GOVERNMENT POLICY
Governments may Policy instruments to Raising interest rates will

attempt to influence affect the exchange rate generally increase demand
the exchange rate. consist of for a currency as savings
–interest rates and – are moved from overseas
direct buying and banks to domestic banks to
selling of currency by benefit from higher interest
the Central Bank. rates.
HIGH or LOW RATES
The exchange rate policy of the Government is
usually challenged in cases such as:
LOWER EXCHANGE RATES

makes export prices competitive and
discourages imports
HIGHER EXCHANGE RATES

cutting import prices, helps to combat
inflation.

2019 PERFORMANCE OF THE PHILIPPINE
PESO OVER OTHER CURRENCIES
TOURISM CONTRIBUTION TO THE ECONOMY
Tourism Direct Gross Value

Added (TDGVA) contribution
to the Gross Domestic
Product (GDP) was estimated
at 12.7 percent or 2.2 Trillion
in 2018
higher by 14.3% compared to
2017 at 1.9 Trillion
This includes the following

The TDGVA graph
information on tourism
representing the
expenditure, transportation
contribution of tourism to
& employment in 2018:
the GDP of the country.
The contribution of tourism 1. Amonth

decent increase despite the six-
closure of Boracay Island
to the Philippine economy in
2018 stood at 12.7%, or 0.5 from April 26-October 26, 2018
percentage point higher from and the slower global economic
growth in 2018 due to the
12.2% in 2017, [but] slower
lingering US-China trade war
than the 1.5 percentage points since July 2018.
growth in 2017. Th
2.
This represents 24.9% of Household
Domestic tourism Final Consumption Expenditure
(HFCE) in 2018.
expenditure grew by 21.0%
or PhP 2.6 trillion in 2017
This includes domestic tourism
to PhP 3.2 trillion in 2018. expenditure of resident visitors
within the country either as
domestic trip or part of an
international trip,.
Inbound Tourism Expenditure
or the Expenditure of Non-
3. Compared to the country’s total
exports, the share of inbound
Resident Visitors (foreign tourism expenditure was 8.0
visitors and Filipinos percent.
permanently residing abroad)
within the Philippines, declined Inbound tourism ranked third
by 1.6% in 2018, amounting among the biggest export items in
to PhP 441.4 billion from PhP 2018, after miscellaneous services
448.6 billion in 2017. at 31.5% and semiconductors
at 22.8%
Shares to Gross Value Added 4. Employment in tourism characteristic

industries was estimated at 5.4
of the following: million in 2018, higher by 1.8
percent compared to 5.3 million in the
Transportation - 21.9% previous year.
Share of employment in tourism

F&B Services - 21.3%
industries to total employment in the
country was recorded at 13.0
Entertainment and percent in 2018.
Recreation Services - 19.9%.
GROSS DOMESTIC PRODUCT (GDP)
The market value for produced within a given period by factors of
production located WITHIN THE COUNTRY.
a. Is concerned only with NEW & CURRENT PRODUCTION.
b. Also EXCLUDES OUTPUT PRODUCED ABROAD by

domestically owned factors of production.
c. INTERMEDIATE GOODS PRODUCED ABROAD (goods

that are produced by one firm for use in further processing by
another firm) are not counted in the GDP.

GROSS NATIONAL PRODUCT (GNP)
The total market value of ALL FINAL GOODS & SERVICES

produced within a given period by factors of production owned by a
country’s citizens regardless of where the output is produced.

EFFECTS OF INFLATION TO TOURISM
INFLATION
Problems arise when
the long term rise in the
unexpected inflation is experienced
prices of goods and services
which is not adequately matched
caused by the devaluation of by a rise in people’s incomes.
currency.
The purchasing power has been
effectively reduced, which can in
turn lead to a slowing or stagnant
economy.
● Food and non-alcoholic beverages
OW IS INFLATION MEASURED● Alcoholic beverages and tobacco
● Clothing and footwear
Statisticians measure inflation by ● Housing, water, electricity, gas and
other fuels
looking at a "basket of goods" which
● Furnishing, household equipment, and
"contain" what the typical Filipino
routine house maintenance
consumes on a regular basis. ● Health
● Transport
● Communication
This long list of goods and their prices ● Recreation and culture
comprise the consumer price index ● Education
(CPI). ● Restaurants and miscellaneous goods
The annual percentage change in the and services
CPI is then used to measure inflation.
WHAT CAUSES INFLATION?
Inflation may be driven either by:
SUPPLY-DRIVEN or COST-PUSH DEMAND-PULL inflation occurs

inflation happens when the cost of when people's demand outpace the
producing goods, the prices of raw ability of industries to supply goods.
materials, and wages go up.
In this scenario, there are fewer goods
being produced due to the high costs of
production, yet demand remains
consistent.
MONEY SUPPLY NATIONAL DEBT
Inflation is primarily caused by an The country’s debt drives inflation and
increase in the money supply that is in the government has two option to
circulation. counter the effect either by:
The less currency that is in circulation, 1. Raising taxes

the more valuable the currency will be. 2. Print more money to pay off the debt.
If government decides to print new

currency, it is essentially devaluing the
money already in circulation.
EXCHANGE RATES
Inflation can be made worse by the Foreign commodities and goods

increasing exposure to foreign become more expensive to local
marketplaces. consumers while simultaneously
making local goods, services, and
An increasingly global economy, exports become cheaper to
exchange rates are one of the most consumers overseas.
important factors in determining the
rate of inflation.
HOW DOES INFLATION AFFECTS YOU?
Inflation may be driven either by: Elevated prices of goods hit hardest
those consumers who have not received
Inflation means you need to pay more for salary increases over time. In effect,
the same goods and services. people have to constantly get a raise to
keep up with the prices of goods.
One could also think of inflation as a
reduction of the value of money, as High inflation is also not good for
consumers are able to purchase less than people who have long-term investments
before. in banks, as it may erode the value of
money.
As inflation rises, the value of the peso
diminishes more quickly.
IS INFLATION ALL BAD?
NO.
In fact, the government wants inflation, but Revising monetary and trade policies, as
only within an acceptable range. well as providing subsidies to the poor, are
only some of the ways by which the
For instance, Philippines economic government can restrain inflation within
managers want inflation for 2018 to 2020 the acceptable range.
to settle between 2% and 4%. The problem,
however, is that inflation in 2018 continues Inflation, especially when it is demand-
to shoot up beyond the target range. driven, is an indicator that people have
more money to spend and reflects a
growing economy.
The government is also Low consumption slows
avoiding deflation, or the down the economy, which
decline of prices of goods. would then lead to fewer jobs
and opportunities.
While it may sound good,
deflation is an indicator of
anemic or poor economic
activity.
CURRENCY MOVEMENT AND PRICES

Thank You!
Does anyone have any questions?

KEY TERMS
1. Terms of trade: relative prices of imports and exports.
2. Balance of payments: record of one country’s financial transactions with the rest of
the world.
3. Exchange rate: price of one currency in terms of another.
4. Current account: value of trade in goods and services.
5. Visible trade: trade in goods. l Invisible trade: trade in services.
6. Devaluation or currency depreciation: movement to a lower exchange rate.

Credits
Book
J. Tribe (2015), Economics of Recreation, Leisure and Tourism, 5 th Ed.
Website
https://study.com/academy/lesson
https.//psa/gov/ph
http://www.bsp.gov.ph/publications
https://www.rappler.com
https://www.philstar.com/business/2020/01/06
https://www.researchgate.net/publication
https://www.investopedia.com

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MACRO ECONOMICS

Balance of Payment and

Prepared by: Eric Rodel R. Dallo, MBA

Prepared by: Eric Rodel R. Dallo, MBA

Classical Economist who

is when a nation or individual concentrates its

It oftentimes has to forgo producing other

an economic term referring to an economy's ability to produce goods and

an economic term referring to an economy's ability to produce goods and

- of a greater total for the same quantity of inputs.

Once countries specialize their production

Prepared by: Eric Rodel R. Dallo, MBA

Nations “dumping” goods trying to drive

Other nations don’t treat their

Established on January 1948 until 1994 and

Extra costs are

Brazil, Russia, India,

Gulf Cooperation Council (GCC)-

Prepared by: Eric Rodel R. Dallo, MBA

the average price of exports ÷

A persistent argument put forward by

Prepared by: Eric Rodel R. Dallo, MBA

an account It records has four main

Prepared by: Eric Rodel R. Dallo, MBA

BOP COMPONENT AND DIFFERENCE

BOP COMPONENT AND DIFFERENCE

BOP COMPONENT AND DIFFERENCE

Prepared by: Eric Rodel R. Dallo, MBA

This may take the form of:

Aimed to stimulate exports by making foreign currency price cheaper

The rationale is that, imports form a significant proportion of consumer

Deflation is achieved through increasing interest rates or increasing

This entails direct controls on imported goods, including taxes on

The threat of retaliation and the rules of international treaties such as

Foreign currency earnings

Tourists arriving Boracay

What impact does casinos

Prepared by: Eric Rodel R. Dallo, MBA

Tourism is an important foreign

What impact has the closure of

Prepared by: Eric Rodel R. Dallo, MBA

Prepared by: Eric Rodel R. Dallo, MBA

The purchase of imported

Prepared by: Eric Rodel R. Dallo, MBA

Prepared by: Eric Rodel R. Dallo, MBA

– How does a rise in a country’s

– makes imports cheaper *e.g

Prepared by: Eric Rodel R. Dallo, MBA

exchange rate is left free to be determined in the foreign

In this, Central Bank allows the exchange rate to adjust to

exchange rate is fixed by the Central Bank of the

- stands ready to buy and sell FOREX at fixed

- Devaluation and Revaluation rest on the

– demand for foreign visible exports

– demand for Philippine visible exports

Prepared by: Eric Rodel R. Dallo, MBA

Governments may Policy instruments to Raising interest rates will

LOWER EXCHANGE RATES

HIGHER EXCHANGE RATES

Prepared by: Eric Rodel R. Dallo, MBA

Tourism Direct Gross Value

This includes the following

The contribution of tourism 1. Amonth