Balance of payments
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Balance of payments

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Balance of payments Balance of payments Presentation Transcript

  • Balance of Payments
  • Balance of Payments • Balance of Payments records a country’s international transactions • Transactions can be between governments, companies, individuals • Divided into – Current account – Capital account
  • Current Account • An important long run and comprehensive measure of country’s transaction with the rest of the world • Comprises of trade in goods and services and income from assets abroad and payment on foreign owned assets in the country • Trade in goods results in Merchandise trade balance: net balance of exports minus imports on merchandise (goods) • Trade surplus = exports>imports (Inflow of cash>outflow of cash) • Trade deficit = exports<imports (Inflow of cash<outflow of cash) View slide
  • Current Account • Trade in services includes freight, passenger fares, royalties, fees, tourism • Other important component is net investment income, interest, profits • Unilateral transfers include relief funds, grants, income earned by guest workers • Simple rule of BoP accounting is that any transaction that gives rise to payment by a country is a deficit item in that country’s BoP. View slide
  • Capital Account • Capital Account shows transactions in real or financial assets between countries – – – – Purchase of real estate FDI, FII Purchase and sale of securities Changes in official reserves of gold, silver, SDRs, and foreign exchange • Transaction of private sector • Official reserves transaction (by central bank)
  • External account must balance • Payments to abroad=receipts from abroad • Current account deficit has to be compensated with capital account surplus • Current account deficit is financed by – Private sector by selling off assets or borrowing abroad – Govt. runs down its official reserves • In case surplus, – private sector can buy assets abroad or pay off past debt or – Central bank can buy foreign exchange earned by private sector and increase reserves
  • External account must balance • Increase in official reserves is called balance of payments surplus • Balance of payments surplus = Increase in official reserves = current account surplus+ net private capital inflow • Balance of payments deficit is a bad news – Means both current and capital accounts are in deficit – Central bank is losing reserves • current account deficit is just equal to capital account surplus, BoP is neither surplus nor deficit
  • Importance • Balance of payments data influence the exchange rates and government policy • Corporate monitor Balance of Payments to watch for factors that could lead to currency instability or government actions to correct an imbalance – Large current account deficit is a bad signal: unstable currency exchange rates
  • Balance of payment Debits (+) Credits (-) Current Account Export of goods Services Income receipts Import of goods and Services Income payments Unilateral transfers (Net) Capital Account Capital Account transactions (net) Financial Account (net official reserves) Amount
  • Balance of payment Debits (+) Credits (-) Current Account Export of goods Services Income receipts Import of goods and Services Income payments Unilateral transfers (Net) Capital Account Capital Account transactions (net) Financial Account (net official reserves) Amount