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Imf 3balance of payment arp

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  • 1. Lecture 3
  • 2. BOPThe BOP is astatistical record ofthe flow of all of thepayments betweenthe residents of acountry and the restof the world in agiven year.
  • 3. Current Account (CA)  This is record of a country’s trade in goods and services in the current period. CA = Exports (X) – Imports (M)  It is divided into 4 sub-categories:  Goods trade  Services trade  Income  Current transfers  The sum of the four sub-categories = CA balance 3
  • 4. Capital Account (KA)  This includes all short- and long-term transactions pertaining to financial assets. KA = Capital Inflow (cr) – Capital outflow (dr)  The two main components:  Capital account.  Financial account (direct, portfolio, other).  KA balance = Sum of capital account and financial account. 4
  • 5. Official Reserves  Records the purchase or sale of official reserve assets by the central bank. These assets include  Commercial paper, Treasury bills and bonds  Foreign currency  Money deposited with the IMF  This account shows the change in foreign exchange reserves held by the central bank. The Balance of  Since the BOP must balance Payments Identity CA + KA + RFX = 0  CA + KA = – RFX  For floating rate regime countries, such as the U.S., official reserves are relatively unimportant. 5
  • 6. Accounting Principles 1. Any transaction resulting in a payment to foreigners is entered in the BOP accounts as a debit and is given a negative sign. 2. Any transaction resulting in a receipt from foreigners is entered as a credit and given a positive sign. 3. Current Account records transactions involving exports and imports of goods and services 4. Capital Account records transactions involving the purchase and sale of assets. 5. Double-Entry book keeping: Every international transaction automatically enters twice, once as a credit and once as a debit. 6
  • 7. Examples of Transactions  An Australian company exports goods worth US$1 million to the United States:  Export of goods is credit for the current account.  Increase in foreign asset (US$1 million) is debit for capital account.  Australian company then coverts US$ into A$ and buys government bonds back in Australia:  Decrease in foreign asset is credit for the capital account.  Increase in government liability is debit for official reserves account.  Australian individual imports a sports car from Europe:  Increase in foreign liabilities is credit for the capital account.  Import of goods is debit for current account. 7
  • 8. BOP & Exchange Rates (X – M) + (CI – CO) + (FI – FO) + FXB = BOPWhere: X = exports of goods and services Current M = imports of goods and services Account CI = capital inflows Capital Balance CO = capital outflows Account FI = financial inflows Balance Financial FO = financial outflows Account Balance FXB = official monetary reserves 8
  • 9. Deficit and Surplus --BOP Sub divided into components accounts (Credit- debit ) net balance is positive --- BOP Surplus “ “ Negative --- BOP DeficitTransaction--- 2 types1. Autonomous2. Accommodating/ CompensatoryTrade BalanceBalance on goods and services(exclude pvt. investment income)Current account balanceBalance on CA and long term KA
  • 10. BOP & Macroeconomic VariablesA nation’s balance of payments interacts with nearly all of its key macroeconomic variables.Interacts means that the BOP affects and is affected by such key macroeconomic factors as:  Gross Domestic Product (GDP)  Exchange rate  Interest rates  Inflation rates 10