BALANCE OF PAYMENTOF ACCOUNTING SYSTEM BOP AMIRAH,UITM
WHAT IS BOP?O Transactions include payments for the countrys exports and imports of goods, services, financial capital, and financial transfers.O Double-entry booking system (debit & credit)O surplus / deficitO Supplies vital information - national economy & likely changes in its fiscal & monetary policyO Highlight a countrys competitive strengths and weaknessesO Achieving balanced economic- growth.
Why is BOP important to international businesspeopleO BOP statistics help identify emerging market for good and servicesO They can warn of possible new policies that may alter a country’s business climate, thereby affecting the probability of a firm’s operation in that country.
O They can indicate reduction in a country’s foreign reserve, which may mean that a country’s currency will depreciate in the future.O They can signal increased in the risk of lending to a particular country.
BALANCE OF PAYMENT The BOP accounting system can be divided conceptually into 4 major account,which is:CURRENT ACCOUNTCAPITAL ACCOUNTOFFICIAL RESERVE ACCOUNTERROR AND OMISSION ACCOUNT
EXPORT AND EXPORT AND IMPORT OF IMPORT OFMERCHANDISE SERVICE CURRENT ACCOUNT INCOME ON GIFT/ INVESTMENT UNILATERAL TRANSFERS
EXPORT AND IMPORT OF MERCHANDISEThe first item record the exports and imports of merchandise or goods.Thedifference between a country exports and import of goods is called THEBALANCE OF MERCHANDISE TRADE.If IMPORTS of merchandise is more than its country EXPORTSTRADE DEFICITIf EXPORT of merchandise is more than its country IMPORTSTRADE SURPLUS
EXPORT AND IMPORT OF SERVICEThe second items record the sale(exports) and purchase(imports)of service to and from another country.The term TRADE ININVISIBLES is also used to describe trade in services.The difference between a country ‘s export of services and itsimport of services is called THE BALANCE ON SERVICE TRADE
INCOME ON INVESTMENT The third item is income Malaysian residents earn from their foreign investment.This income is viewed as AN EXPORT OF THE SERVICE OF CAPITAL by Malaysian.Income earned by foreigners from their investment in Malaysia is known as AN IMPORT OF THE SERVICES OF CAPITAL by Malaysia. GIFT/ UNILATERAL TRANSFERSThese are gift between residents of one country and another country.
CAPITAL ACCOUNTFOREIGN PORTFOLIODIRECT INVESTMENTINVESTMENT SHORT TERM LONG TERM
FOREIGN DIRECT INVESTMENT FDI is any investment made for the purpose of controlling the organization in which the investment is made.It records the net balance of capital that flows out of and into the country for the purpose of exerting control over assets.
PORTFOLIO INVESTMENTPortfolio investment is any investment made for purpose other than controlor ownership of assets.It is capital that is invested in activities that are purelyprofit-motivated(return) than ones made in the prospect of controlling ormanaging or directing the investment.It include:SHORT TERM PORTFOLIO INVESTMENT-These are financial instrument such as shares,debt securities,treasury billsor bonds with maturity of 1 year or less.LONG TERM PORTFOLIO INVESTMENT-These are stocks,bond,bank loans and other financial instrument issued byprivate and public organization that have maturity greater than 1 year andthat are held for purpose other than control.
CAPITAL ACCOUNT TRANSACTIONS MATURITY MOTIVATION TYPICAL INVESTMENTPORTFOLIO 1 year or less Investment Checking acc(short term) income or balances facilitation of Time deposits international Commercial commerce paper Bank loansPORTFOLIO More than 1 year Investment Gov(long term) income bills,notes,&bond Corporate stocks &bondFOREIGN inderterminate Active control of ForeignDIRECT organization subsidiariesINVESTMENT (own at least Foreign factories 10% of voting International joint stock) ventures
Official Reserves Account-Records the level of official reserves held by anational government .-Used to intervene in the foreign-exchange marketand in transactions with other central banks .-Four types : Gold Convertible currencies Special Drawing Rights Reserve positions at the IMF
Errors And Omissions Account O The fact of the BOP accounting system is that the BOP must balance . O Equation : current acc + capital acc + errors & omissions + official reserves acc = 0 O Large portion of the errors and omissions is probably due to under reporting of capital account transactions . O Sometimes , errors and omissions due to deliberate actions and frequently illegal such as drug smuggling , money laundering . O Other are related to the current account particularly merchandise exports and trade in services .
Defining BOP Surpluses and Deficits BOP Current account Official Settlements Capital Balance AccountTrade Surplus = Trade Deficits Exports > =Exports < Imports Imports Inflow Outflow