Engineering Economy

1. BBaallaannccee ooff ppaayymmeenntt
Bahram Nawabi 2012UCE1790

2. CONTENTS
What is the balance of
payments.
Classification of (BOP).
Gold standard.
SDR.
International liquidity.

3. BOP
What Is TThhee BBaallaannccee OOff PPaayymmeennttss??
Countries track money coming in and going
out through something called the balance of
payments.
The balance of payments (BOP) is the
method countries use to monitor all
international monetary transactions at a
specific period of time. Usually, the BOP is
calculated every quarter and every calendar
year.

4. BOP
All trades conducted by both the private and
public sectors are accounted for in the BOP in
order to determine how much money is going
in and out of a country. If a country has
received money, this is known as a credit,
and, if a country has paid or given money, the
transaction is counted as a debit.

5. BOP
Theoretically, the BOP should be zero,
meaning that assets (credits) and liabilities
(debits) should balance. But in practice this is
rarely the case and, thus, the BOP can tell the
observer if a country has a deficit or a surplus
and from which part of the economy the
discrepancies are stemming.

6. Divided into..
Current account
Capital account
financial account

7. Current A/c
The Current Account
The current account is used to mark the
inflow and outflow of goods and services into
a country. Earnings on investments, both
public and private, are also put into the
current account.

8. Current A/c
….Within the current account are credits and
debits on the trade of merchandise, which
includes goods such as raw materials and
manufactured goods that are bought, sold or
given away (possibly in the form of aid).
Services refer to receipts from tourism,
transportation (like the levy that must be paid in
Egypt when a ship passes through the Suez
Canal), engineering, business service fees
(from lawyers or management consulting, for
example)

9. Current A/c Transactions
Merchandise Export fob
Merchandise Import fob
Export of a non-financial service
Investment Income: Export of a financial
service
An unrequited Transfer

10. Capital A/c
The Capital Account
The capital account is where all international
capital transfers are recorded. This refers to
the acquisition or disposal of non-financial
assets (for example, a physical asset such as
land) and non-produced assets, which are
needed for production but have not been
produced, like a mine used for the extraction
of diamonds.

11. Capital A/c Transactions
A reserve transaction with a non-resident
A reserve transaction with a resident

12. Financial account
In the financial account, international
monetary flows related to investment in
business, real estate, bonds and stocks are
documented.
Also included are government-owned assets
such as foreign reserves, gold, special
drawing rights (SDRs) held with the
International Monetary Fund, private assets
held abroad, and direct foreign investment.
Assets owned by foreigners, private and
official, are also recorded in the financial
account.

13. Gold standard
Definition:
A commitment by participating countries to fix
the prices of their domestic currencies in
terms of a specified amount of gold. National
money and other forms of money(bank
deposits & notes) were freely converted into
gold at the fixed price.

14. Advantages
During war time emergencies govt.
emphasizes on purchasing gold standard
which would be helpful in post-war deflations.
The gold standard limits the power of govt. to
inflate prices through excessive issuance of
paper currency.

15. Disadvantages
Gold standard means amount of money
would be determined by supply of gold &
hence monetary policy could no longer be
used to stabilize the economy in times of
economic recessions.
Monetary policy be determined by the rate of
gold production. Fluctuation in the amount of
gold that causes inflation if there is an
increase or deflation if there is a decrease.

16. SDR
Special Drawing Rights are defined in terms
of a basket of major currencies used in
international trade & finance.
Why was the SDR created:-
The SDR was created by the IMF in 1969 to
support the Bretton Woods fixed exchange
rate system.

17. Purpose
SDRs are used as a unit of account by the
IMF & several other international
organization.
SDRs were originally created to replace gold
& silver in large international transactions.

18. Bretton Woods system
The Bretton Woods system of monetary
management established the rules for
commercial and financial relations among the
world's major industrial states in the mid-20th
century.

19. International liquidity
International Liquidity meant the relative
amount of resources available to a nation’s
monetary authorities that could be used to
settle a balance of payment deficit.

20. Thanks you!