External Sector

Econ 102 _2013

 External Sector
How is a country linked with other countries in the
global world?

1) There are exchange of Goods and Services

2) There are exchange of Assets

What is different?
We have Philippines Peso (PHP), US has US dollars ($)
and European Union has Euro(€)
 Foreign currency
• Exchange rate is the Php price of a foreign
currency in the Philippines.
Eg. $1 = Php 54.39 (Ph price of one dollar) or
$0.018 = Php 1.00 ( dollar price of one peso)

• If Php price of a $ increases, Php depreciates

• (Php becomes less valuable compared to $)
 Exchange of Goods and Services
• Exports are the goods that we sell (and foreign
economies buy). Hence, it is a source of foreign
exchange.
Exports= F( Yforeign, exchange rate)

• Imports are the good that we buy (foreign sell to

us). Hence we use foreign exchange to purchase
imports
Imports= F( Ydomestic, exchange rate)
 Net Exports
• Net Exports = value of Exports- value of imports

Net Exports = F( Y domestic , Yforeign, exchange rate)

This is also called the Trade Balance

 Exchange of Financial Assets
• We exchange Bonds, Shares, other assets.

Asset demand = (idomestic – iforeign, other risk factors)

How are the foreign transaction recorded?

• Balance of Payments: (Ödemeler Dengesi)

Accounting method of all monetary
transactions, with double entry system. Every
transaction is recorded in different parts of the
Balance of Payments.
 Balance of Payments
1. Current Account
2. Financial Account
3. Balance of Capital Account
 Current Account
- Exports of goods (+)
- Imports of goods (-)
- Balance of trade
- Exports of services(+)
- Imports of services(-)
- Balance of services
- Income received on investment (+)
- Income payments on investment (-)
- Net income on investment
- Net transfers (+) (-)
- Balance on current account
 Financial Account
- Increase in foreign holdings of assets in Turkey (+)
- Increase in Turkey’s holding of assets in foreign countries
(-)
- Balance on Financial Account
 Capital Account
- Statistical Discrepancy
- Balance of Payments
 Foreign Exchange Market
• Systems of Foreign Exchange:
1. Fixed Exchange Rate System: Central Bank
determines the rate at which domestic currency is
exchanged in to foreign currency.
2. Flexible Exchange Rate System: market
determines the the rate at which domestic currency
is exchanged in to foreign currency
 Foreign Exchange Market

Php price of foreign currency

Demand for foreign currency Supply of Foreign Currency

Quantity of Foreign Currency

 The Change in Foreign Exchange Market
Equilibrium when Philippine Imports increase

Php price of foreign currency

Demand for foreign currency Supply of Foreign Currency

Quantity of Foreign Currency

The Php price of US dollar increases, i.e. Php depreciates
 The Change in Foreign Exchange Market
Equilibrium when Philippine residents
purchase Foreign Bonds
Php price of foreign currency
Demand for foreign currency Supply of Foreign Currency

Quantity of Foreign Currency

The Php price of US dollar increases, i.e. Php depreciates
 Gross External Debt
Total External Debt

373
339
304
292
281
269
250

208

170
161
144
130

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q3