U N D E R S T A N D I N G - A N A L Y S I S - I N T E R P R E T A T I O N
BALANCE OF PAYMENT
INTRODUCTION
• The statistical record of a country’s international
transactions over a certain period of time presented in...
CASE #1
• The Boeing Corporation exported a Boeing 747 aircraft
to Japan Airlines for $50 Mn, and that Japan Airlines
pays...
CASE #2
• Boeing imports jet engines produced by Rolls-Royce for
$30Mn and that Boeing makes payment by transferring
the f...
CASE #3
• Ford acquires Jaguar, a British car manufacturer, for
$750 Mn and Jaguar deposits the money in Barclays
Bank in ...
ACCOUNT
Transactions Credit Debit
Boeing’s export + $50 million
Withdrawal from US Bank - $50 million
Bowing’s import - $3...
COMPOSITION
• A country’s international transactions can be grouped
into three main categories:
• The current account
• Th...
THE CURRENT ACCOUNT
• It includes
• Exports and imports of goods
• Exports and imports of services
• Divided into four sub...
THE CAPITAL ACCOUNT
• It includes:
• All purchases and sales of assets such as stocks, bonds,
bank accounts, real estate a...
THE OFFICIAL RESERVE ACCOUNT
• It includes:
• All purchases and sales of international reserve assets, such
as dollars, fo...
ANALYSIS WITH AN EXAMPLE
• US exports were $2116 Bn in 2009 while US imports were
$2405.6 billion. The current account bal...
CONTD.
Credit Debit
Current Account
1. Exports 2116.0
1.1 Merchandise 1050.0
1.2 Services 504.81.2 Services 504.8
1.3 Fact...
CONTD.
Credit Debit
Capital Account
4. Direct investment 152.1 -221.0
5. Portfolio investment 376.6 -549.4
5.1 Equity secu...
INTERPRETATION
• A country can run BoP surplus or deficit by increasing or
decreasing its official reserves.
• Under the f...
PRACTICE QUE.
1. Define Balance of Payments.
2. Why would it be useful to examine a country’s balance-of-
payments data?
3...
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Balance of payment, Current Account, Capital Account, Unilateral transfers

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Balance of payment, Current Account, Capital Account, Unilateral transfers

  1. 1. U N D E R S T A N D I N G - A N A L Y S I S - I N T E R P R E T A T I O N BALANCE OF PAYMENT
  2. 2. INTRODUCTION • The statistical record of a country’s international transactions over a certain period of time presented in the form of double-entry book-keeping. • In BoP, any transaction resulting in a receipt from foreigners is recorded as a credit, with a positive signforeigners is recorded as a credit, with a positive sign • any transaction resulting in a payment to foreigners is recorded as a debit, with a minus sign
  3. 3. CASE #1 • The Boeing Corporation exported a Boeing 747 aircraft to Japan Airlines for $50 Mn, and that Japan Airlines pays from its dollar bank account kept with Chase Manhattan Bank in New York City. Then, the receipt of $50 Mn by Boeing will be recorded as a credit (+), which$50 Mn by Boeing will be recorded as a credit (+), which will be matched by a debit (-) of the same amount representing a reduction of the U.S. bank’s liabilities.
  4. 4. CASE #2 • Boeing imports jet engines produced by Rolls-Royce for $30Mn and that Boeing makes payment by transferring the funds to a New York bank account kept by Rolls- Royce. In this case, payment by Boeing will be recorded as a debit (-), whereas the deposit of the funds by Rolls-as a debit (-), whereas the deposit of the funds by Rolls- Royce will be recorded as a credit (+).
  5. 5. CASE #3 • Ford acquires Jaguar, a British car manufacturer, for $750 Mn and Jaguar deposits the money in Barclays Bank in London, which, in turn, uses the sum to purchase U.S> treasury notes. In this case, the payment of $750 Mn by Ford will be recorded as a debit (-) whereas Barclaysby Ford will be recorded as a debit (-) whereas Barclays purchase of the US Treasury notes will be recorded as a credit (+)
  6. 6. ACCOUNT Transactions Credit Debit Boeing’s export + $50 million Withdrawal from US Bank - $50 million Bowing’s import - $30 million Deposit at US bank + $30 millionDeposit at US bank + $30 million Ford’s acquisition of Jaguar - $750 million Barclays’ purchase of US securities +$750 million Balance of Payment $ 830 million $ 830 million
  7. 7. COMPOSITION • A country’s international transactions can be grouped into three main categories: • The current account • The capital account • The official reserve account• The official reserve account
  8. 8. THE CURRENT ACCOUNT • It includes • Exports and imports of goods • Exports and imports of services • Divided into four subcategories: • Merchandise trade• Merchandise trade Represents exports and imports of tangible goods, • Services Receipts and payments for legal, engineering, consulting and other performed services and tourist expenditures • Factor income Payments and receipts of interest, dividends and other income on previously made foreign investments • Unilateral transfers Unrequited payments such as gifts, foreign aid, and reparations
  9. 9. THE CAPITAL ACCOUNT • It includes: • All purchases and sales of assets such as stocks, bonds, bank accounts, real estate and businesses • Divided into three sub-categories: • Direct investment• Direct investment Acquisitions of controlling interests in foreign businesses • Portfolio investment Investments in foreign stocks and bonds that do not involve acquisitions of control • Other investment Includes Bank deposits, Currency investment, Trade credit etc
  10. 10. THE OFFICIAL RESERVE ACCOUNT • It includes: • All purchases and sales of international reserve assets, such as dollars, foreign exchanges, gold and SDRs. • Computing the cumulative balance of payments including the current account, capital account, and theincluding the current account, capital account, and the statistical discrepancies, we get overall balance or official settlement balance • It is indicative of a country’s BoP gap that must be accommodated by official reserve transactions. • If a country must make a net payment to foreigners because of a BoP deficit, the country should run down its official reserve assets such as gold, foreign exchanges and SDRs or borrow a new from foreigners.
  11. 11. ANALYSIS WITH AN EXAMPLE • US exports were $2116 Bn in 2009 while US imports were $2405.6 billion. The current account balance, which is defined as exports minus imports plus unilateral transfers, that is, (1) +(2) + (3) was negative -$419.8 Bn. The US thus had a balance-of-payments deficit on the currenthad a balance-of-payments deficit on the current account in 1009. the current account deficit implies that the United States used up more output than it produced.
  12. 12. CONTD. Credit Debit Current Account 1. Exports 2116.0 1.1 Merchandise 1050.0 1.2 Services 504.81.2 Services 504.8 1.3 Factor Income 561.2 2. Imports -2405.6 2.1 Merchandise -1562.7 2.2 Services -370.7 2.3 Factor Income -472.2 3. Unilateral transfer 19.2 -149.4 Balance on Current Account (1 + 2 + 3) -419.8
  13. 13. CONTD. Credit Debit Capital Account 4. Direct investment 152.1 -221.0 5. Portfolio investment 376.6 -549.4 5.1 Equity securities 141.9 -68.65.1 Equity securities 141.9 -68.6 5.2 Debt securities 234.7 -480.8 6. Other investment 616.3 -93.5 Balance on capital account (4 + 5 + 6) 281.1 7. Statistical Discrepancies 192.8 Overall balance 52.2 Official Reserve Account -52.2
  14. 14. INTERPRETATION • A country can run BoP surplus or deficit by increasing or decreasing its official reserves. • Under the fixed exchange rate regime , the combined balance on current and capital accounts will be equal in size, but opposite in sign, to the change in the officialin size, but opposite in sign, to the change in the official reserves. Under the pure flexible exchange rate regime where the central bank does not maintain any official reserves, a current account surplus or deficit must be matched by a capital account deficit or surplus.
  15. 15. PRACTICE QUE. 1. Define Balance of Payments. 2. Why would it be useful to examine a country’s balance-of- payments data? 3. Comment on the statement: “Since the United States imports more than it exports, it is necessary for United States to importmore than it exports, it is necessary for United States to import capital from foreign countries to finance its current account deficits.” 4. Explain how a country can run an overall balance-of- payments deficit or surplus. 5. Explain official reserve assets and its major components.
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