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BOP SFLS part 2 equilibrium
- 2. 3.) Balance between Accounts Balance of Payments: 1.) Some Vocabulary 2.) The Accounts 4.) Balance between Countries 5.) States of Equilibrium PPT 2 6.) Problems with Deficit/Surplus 7.) Disequilibrium
- 3. Capital account Financial account Financial account Off-sets Non – Financial assets Fixed assets Capital account Official Reserves Portfolio Investment Direct Investment Income Current Transfers Trade in Goods Trade in Services Current account Balance of Payments This double booking accounting that is done here is an ‘Accounting Identity’
- 4. Accounting Identity会计等式 Balance of Payments Current account Capital account Financial account 0 - By definition this is supposed to be true. - Add up the amount of each side and the total should be zero. - A positive number on the current account side should be balanced by a negative number on the cap/financial accounts side.
- 5. Balance of Payments If the money is spend only in China and never leaves China, then nothing is counted in BOP. But if the money leaves or enters the country then it is counted in the BOP somehow. The point of this is to understand and follow where the money is going.
- 6. RMB can only be spent in China… Balance of Payments If it leaves China it has to come back to China in some way… All the money that leaves the country has to come back into that country someway because it can only be spent in that country!
- 7. RMB can only be spent in China… Balance of Payments If it leaves China it has to come back to China in some way… So the accounts have to balance to zero somehow! Accounting Identity会计等式 Current account Capital account Financial account 0 - All the money leaving the country should be balanced by all the money entering the country.
- 8. If America sells something to China for 2RMB then China will have to pay using Chinese RMB. Balance of Payments Even if you transferred money into the bank first the same result eventually happens, - stuff goes to one country, - money goes to the other.
- 9. China has now lost money from buying an import so it’s counted in the current account so it’s in deficit. Balance of Payments Current account Capital account Financial account China’s BOP Current account = -2
- 10. If America was to buy an export from China for the same amount then everything balances back out. Balance of Payments Current account Capital account Financial account China’s BOP Current account = 0
- 11. But if instead America buys something for only 1RMB than the NET effect is that the current account is still in deficit. Balance of Payments Current account Capital account Financial account China’s BOP Current account = - 1
- 12. So America has 2 RMB that can ONLY be spent in China… Balance of Payments Current account Capital account Financial account China’s BOP It can buy something from China to bring back t America or just gift the money back… Current Transfers Trade in Goods Trade in Services Or it can buy something that stays in China but belongs to the American buyer… Direct Investment Non – Financial assets Fixed assets Portfolio Investment
- 13. America can buy a factory or some other building in China Balance of Payments Current account Capital account Financial account China’s BOP All accounts = 0 Current account = -2 Financial account = +2 Ownership Of the factory
- 14. The RMB can only be spent in China… Balance of Payments Current account Capital account Financial account China’s BOP All accounts = 0 Current account = -2 Financial account = +2 Ownership Of the factory It has to come back to China in some way… So the accounts have to balance to zero somehow!
- 15. RMB can only be spent in China… Balance of Payments If it leaves China it has to come back to China in some way… So the accounts have to balance to zero somehow! Accounting Identity会计等式 Current account Capital account Financial account 0 - All the money leaving the country should be balanced by all the money entering the country. Remember…
- 16. Income Current Transfers Trade in Goods Trade in Services If NET total is negative = Trade Deficit If NET total is positive = Trade Surplus Current account Balance of Payments If the net total of side of the BOP is negative it is said to have a trade deficit. If the net total of side of the BOP is positive it is said to have a trade surplus.
- 17. Income Current Transfers Trade in Goods Trade in Services If NET total is negative = Trade Deficit If NET total is positive = Trade Surplus Current account Balance of Payments Trade surplus Trade deficit Amount of exports China’s current account America’s current account
- 18. Financial account Off-sets Non – Financial assets Fixed assets Capital account Official Reserves Portfolio Investment Direct Investment Current account Balance of Payments If NET total is negative = Trade Surplus If NET total is positive = Trade Deficit Notice that every thing is the opposite for this side… If you have a surplus on the current account side, (+ #) then the money has to come back in the cap/financial side (- #) so it all balances out.
- 19. Financial account Off-sets Non – Financial assets Fixed assets Capital account Official Reserves Portfolio Investment Direct Investment Current account Balance of Payments If NET total is negative = Trade Surplus If NET total is positive = Trade Deficit Trade deficit Amount of exports Trade surplus China’s cap/finacial account America’s cap/finanical account
- 20. Capital account Financial account Financial account Off-sets Non – Financial assets Fixed assets Capital account Official Reserves Portfolio Investment Direct Investment Income Current Transfers Trade in Goods Trade in Services Current account If NET total is negative = Trade Surplus If NET total is positive = Trade Deficit If NET total is negative = Trade Deficit If NET total is positive = Trade Surplus Balance of Payments
- 21. Balance of Payments Current account Capital account Financial account If current account is < 0 Capital/Financial account is > 0 If current account is > 0 Capital/Financial account is < 0 If NET total is negative = Trade Surplus If NET total is positive = Trade Deficit If NET total is negative = Trade Deficit If NET total is positive = Trade Surplus
- 22. 3.) Balance between Accounts Balance of Payments: 1.) Some Vocabulary 2.) The Accounts 4.) Balance between Countries 5.) States of Equilibrium 6.) Problems with Deficit/Surplus 7.) Disequilibrium
- 23. To start we will look at the BOP using two example countries though all these following slides… Balance of Payments Country A Country B When you trade between countries a credit or debit must be recorded in both countries BOP at the same time.
- 24. Country A Country B BOP is counting all the ways that money goes from inside and outside a country. But the people in these countries buy things form each other. Balance of Payments All the people in this country are ugly and use Dollars. All the people in this country smell funny and use RMB.
- 25. Did the money cross this line and leave the country? If it did you count it in BOP but depending on how it crosses and what you use the money for it gets counted in different accounts? Country A Country B Balance of Payments
- 26. Mr. Blue has a motorcycle for sale in his country. Mr. Red wants to buy it and bring it to his country so he pays for it. So they exchange Country A Country B Balance of Payments
- 27. This is a trade in goods Current accountCurrent account Country A Country B Balance of Payments
- 28. Mr. Blue doesn’t want this money since it is not dollars so he gives it to his bank. Nothing is counted in BOP since the money never moved between countries. Nothing crossed the line. Country A Country B Balance of Payments
- 29. The bank doesn’t want the money either since it is in the country A economy and this money can only be spent in the country B economy. So the bank may invest the money somehow… So for example the bank buys a government bond in the country B economy because it can earn interest on it. BOND Country A Country B Balance of Payments
- 30. Financial accountFinancial account BOND Country A Country B Balance of Payments
- 31. Financial accountFinancial account Current accountCurrent account BOND Country A Country B Balance of Payments
- 32. Financial accountFinancial account Current accountCurrent account Not so hard right? This is just an example, it doesn’t always have to be this way but this is a common way. BOND Country A Country B Balance of Payments
- 33. Now of course most of the time Mr. Blue will not ever accept RMB for his motorcycle. Mr. Red knows this so he first have to go to a bank to exchange money. Country A Country B Balance of Payments
- 34. He will either exchange it with a bank in country A’s country for dollars…. Country A Country B Balance of Payments
- 35. and buy the bike… Country A Country B Balance of Payments He will either exchange it with a bank in country A’s country for dollars….
- 36. Or exchange it with his own bank to get dollars… and buys the bike. Country A Country B Balance of Payments
- 37. The country B bank now needs more dollars for next time so then the banks exchange the money they used. Country A Country B Balance of Payments
- 38. Either way it’s the same thing, you count the money once it crossed the line. and something was sold in one country to another. Country A Country B Balance of Payments
- 39. Here is another example… Country A Country B Balance of Payments
- 40. Mr. Blue has a hotel for sale in his country. Mr. Red wants to buy this hotel because he thinks it will be a good investment. Ownership of the hotel Country A Country B Balance of Payments So they exchange…
- 41. Ownership of the hotel Country A Country B Balance of Payments Mr. Red in country B owns the hotel but it stays in country A.
- 42. Country A has lost an asset but has the money. Country B has gained an asset but lost the money. Financial accountFinancial account Remember we are counting where the money is flowing. Country A Country B Balance of Payments Ownership of the hotel
- 43. Let’s take that example a little further… Country A Country B Balance of Payments
- 44. Now lets say that the hotel has made a nice profit… Country A Country B Balance of Payments Ownership of the hotel
- 45. Now Mr. Red spends some of this money to buy a cheese burger in a restaurant in country A. 好吃 Country A Country B Balance of Payments Ownership of the hotel
- 46. Nothing is counted on BOP. Nothing crossed this line. Country A Country B Balance of Payments Ownership of the hotel
- 47. Now lets say that Mr. Red decides to take his profits and go back to country B. Country A Country B Balance of Payments Ownership of the hotel
- 48. This is counted in the Income Account part of the Current Account. Current accountCurrent account Country A Country B Balance of Payments Ownership of the hotel
- 49. Now let’s step back for a minute and look again at this hotel investment… Country A Country B Balance of Payments
- 50. Mr. Blue sold the hotel to a foreigner. Mr. Red owns the hotel completely even though he is from a different country. Country A Country B Balance of Payments Ownership of the hotel
- 51. Country A has lost an asset but gained some money. Country B has gained an asset from another country. Financial accountFinancial account Got it right? Country A Country B Balance of Payments Ownership of the hotel
- 52. This goes into the Direct Investment part of the Financial Account. Direct InvestmentDirect Investment Country B owns something in country A. This can be good for both sides. Country A has money invested into growing the economy of its country and country B has a good place to make some money. Country A Country B Balance of Payments Ownership of the hotel
- 53. Direct Investment is good! This is investment that will stay in the country and is invested for the long run! Direct Investment is bad! That means things in your country are owned by ugly stinky foreign devils! 重要 Country A Country B Balance of Payments Ownership of the hotel Important to both of these arguments sides.
- 54. Now change this just a little bit… Country A Country B Balance of Payments
- 55. Mr. Blue does NOT sell the hotel to Mr. Red but instead sells him a bond with a promise to pay interest. Mr. Red likes the country A economy and wants to invest in it but doesn’t want to manage a hotel. BOND with 5% interest Mr. Red gets a bond… Country A Country B Balance of Payments Ownership of the hotel
- 56. This goes into the Portfolio Investment part of the Financial Account. Portfolio InvestmentPortfolio Investment Country A Country B Balance of Payments BOND with 5% interest Ownership of the hotel
- 57. Portfolio Investment is good! Foreigners like your country and are giving you money to grow your economy! Portfolio Investment is bad! In is only short run investment. That means if the economy in your country look bad, investors get scared and leave with all their money and actually can make the economy worse off! 重要 Country A Country B Balance of Payments BOND with 5% interest Ownership of the hotel Important to both of these arguments sides.
- 58. Remember this Bond will earn interest that Mr. Blue will pay to Mr. Red. Remember how to count it if that money crosses this line… Country A Country B Balance of Payments BOND with 5% interest Ownership of the hotel
- 59. I hope that is clear. Thank you guys for your help and enjoy your motorcycle Mr. Red! Country A Country B Balance of Payments
- 60. Balance of Payments So to summarize…
- 61. Balance of Payments: 1.) Some Vocabulary 2.) The Accounts 3.) Balance between Accounts 4.) Balance between Countries 5.) States of Equilibrium 6.) Problems with Deficit/Surplus 7.) Disequilibrium
- 62. Accounting Identity会计等式 Balance of Payments Current account Capital account Financial account 0 - By definition this is supposed to be true. - Add up the amount of each side and the total should be zero. - A positive number on the current account side should be balanced by a negative number on the cap/financial accounts side.
- 63. RMB can only be spent in China… Balance of Payments If it leaves China it has to come back to China in some way… So the accounts have to balance to zero somehow! Accounting Identity会计等式 Current account Capital account Financial account 0 - All the money leaving the country should be balanced by all the money entering the country.
- 64. Income Current Transfers Trade in Goods Trade in Services If NET total is negative = Trade Deficit If NET total is positive = Trade Surplus Current account Balance of Payments Trade surplus Trade deficit Amount of exports China’s current account America’s current account
- 65. Capital account Financial account Financial account Off-sets Non – Financial assets Fixed assets Capital account Official Reserves Portfolio Investment Direct Investment Income Current Transfers Trade in Goods Trade in Services Current account If NET total is negative = Trade Surplus If NET total is positive = Trade Deficit If NET total is negative = Trade Deficit If NET total is positive = Trade Surplus Balance of Payments
- 66. 3.) Balance between Accounts Balance of Payments: 1.) Some Vocabulary 2.) The Accounts 4.) Balance between Countries 5.) States of Equilibrium 6.) Problems with Deficit/Surplus 7.) Disequilibrium
- 67. Balance of Payments Country A Country B When you trade between countries a credit or debit must be recorded in both countries BOP at the same time.
- 68. Did the money cross this line and leave the country? Country A Country B Balance of Payments If so it must be counted on both sides.
- 69. Financial account Off-sets Non – Financial assets Fixed assets Capital account Official Reserves Portfolio Investment Direct Investment Current account Balance of Payments If NET total is negative = Trade Surplus If NET total is positive = Trade Deficit Trade deficit Amount of exports Trade surplus China’s cap/finacial account America’s cap/finanical account
- 70. Ownership Of the hotel Direct Investment is good! This is investment that will stay in the country and is invested for the long run! Direct Investment is bad! That means things in your country are owned by ugly stinky foreign devils! 重要 Country A Country B Balance of Payments Important to both of these arguments sides.
- 71. Ownership Of the hotel BOND with 5% interest Portfolio Investment is good! Foreigners like your country and are giving you money to grow your economy! Portfolio Investment is bad! In is only short run investment. That means if the economy in your country look bad, investors get scared and leave with all their money and actually can make the economy worse off! 重要 Country A Country B Balance of Payments Important to both of these arguments sides.
- 72. One more set of examples… Balance of Payments
- 73. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account Chinese company buys wine from a French company. Debit to China’s goods part of current account Credit to France’s goods part of current account.
- 74. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account Chinese resident purchases a bond from an Italy company. Debit to China’s portfolio part of financial account. Credit to Italy’s portfolio part of financial account.
- 75. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account Chinese parents pay for their daughter to study at an American university. Credit to America’s services in current account. Debit to China’s services in current account. Actually in the U.S. this might even count under transfers, remember some countries do it a little different then others.
- 76. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account America university gives a tuition grant to a sophomore foreign student from China. If the student is already in America no entry will appear in the balance of payments because payment is within America.
- 77. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account Brazilian company imports Japanese video games, paying with euros from a Brazilian bank. Debit to the goods part of Brazil’s current account. Credit to the goods part of Japan’s current account.
- 78. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account The Japanese video game seller deposits half the proceeds of its sale in a Brazilian bank. Debit to the income part of Japan’s current account. Credit to the income part of the Brazilian’s current account.
- 79. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account The Japanese video game seller buys a house in Brazil. Debit to the non-financial assets part of Japan’s capital account. Credit to the non-financial assets part of the Brazilian’s capital account.
- 80. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account A British person owns a factor in Singapore and brings his money with him back home to the UK. Debit to the income part of the Singapore’s current account. Credit to the income part of the UK’s current account.
- 81. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account UK resident gets a job working in Singapore and is paid in Singapore dollars money assuming the money is spend in the UK. Debit to the current transfers part of the Singapore’s current account. Credit to the current transfers part of the UK’s current account.
- 82. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account American resident buys drugs可卡因 from a Cuban drug lord.毒枭 Nothing is counted, this is illegal.
- 83. Balance of Payments Current account Cap/ Financial account How is this counted for both countries? Current account Cap/ Financial account German bank forgives $5000 in debt owed to it by the government of France. Debit to the financial account of the Germany. Credit to the financial account of the Germany. Forgiving the debt is saying you don’t have to pay back the money you owed, it’s like the money just disappeared.
- 84. Income Current Transfers Trade in Goods Trade in Services If (NET ) total is negative = Trade Deficit If (NET ) total is positive = Trade Surplus Financial account Financial assets Off-sets Non – Financial assets Fixed assets Capital account Official Reserves If (NET ) total is negative = Trade Surplus If (NET ) total is positive = Trade Deficit So Wait! I didn’t explain a very important thing that is apart of this! Balance of Payments Current account Capital account Financial account
- 85. Income Current Transfers Trade in Goods Trade in Services If (NET ) total is negative = Trade Deficit If (NET ) total is positive = Trade Surplus Financial account Financial assets Off-sets Non – Financial assets Fixed assets Capital account Official Reserves If (NET ) total is negative = Trade Surplus If (NET ) total is positive = Trade Deficit This part Balance of Payments Current account Capital account Financial account
- 86. Current account Income Current Transfers Trade in Goods Trade in Services If (NET ) total is negative = Trade Deficit If (NET ) total is positive = Trade Surplus Capital account Financial account Financial account Financial assets Off-sets Non – Financial assets Fixed assets Capital account Official Reserves If (NET ) total is negative = Trade Surplus If (NET ) total is positive = Trade Deficit For now I will tell you that governments hold other money from other countries all the time, either for saving or for use if people need to exchange money. This will be important when dealing with exchange rates. But I think I will get into that later… Balance of Payments
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