Case Study Objectives:
• Preparation of Argentina’s complete balance of payment for the previous year and a forecast for next year. • Effects of devaluation on sales if it occurs in Argentina’s economy. • Borrowing decision feasibility for M/s Jeans USA
Trade balance is in a healthy position $4.691 BN and is likely to increase Exports are $12.078 BN and are expected to increase to $13 BN which is 8% for next year. Imports are likely to be remain constant
Foreign reserves are $10 BN
Business prospects are excellent in Argentina
BALANCE OF PAYMENTS
| |$ in billions | |Exports |12.078 | |Imports |-7.387 | |Trade Balance |=+4.691 | |Service Sector |-1.169 | |Investment Income |-6.051 | |( Unrequited Transfers |+0.029 | |Current Account Balance |=-2.5 | | | |
| |$ in billions | |Direct Investment |2.439 | |Portfolio Investment |-0.199 | |Other Capital (not mentioned elsewhere) |-1.365 | |Net Errors and Emissions |-0.341 | |( Change In Reserves |+1.966 | |Capital Account Balance |=+2.5 |
From the case study, we agree with the forecast by the consulting company on Argentina’s current account deficit as it was -$2.5billion last year. A deficit on the current account means that a country is importing more than they are exporting.
However, in Argentina business prospect, they exported more than they imported. Therefore, the high number in the current account deficit is mainly from the net investment income rather than the goods and services. The reason for this deficit could be caused by the following which are, Argentina excess spending in the economy, fixed exchange rate, high inflation. Government borrowing could have a part to play as this will increase and aggregate the demand in the economy and thus increases the demand for import. This could be the reason for the high import seen by the industrial, construction and service sector. Fixed exchange rate can also be the cause of current account deficit in the balance of payment in a way that, assuming the currency is overvalued, import will be cheaper. Therefore, there will be a higher demand for import. in the other hand, exports will be uncompetitive and there will be a reduction in exports which will in turn affect balance of payment (current account deficit). High inflation will make goods to be priced highly. This factor can also be offset by a decline in the value of currency.
Moreover, current account deficit is not always a problem but could be beneficial to some extent for several reasons. For example; assuming a current account deficit is financed from capital inflows, then this can be beneficial for the economy. Therefore, flow of investment...
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