Balance of Payments Accounting By Dr. Neelam Tandon
The Balance of Payments <ul><li>Recall the open economy accounting identity: Income = Expenditures </li></ul><ul><ul><ul><...
Balance of Payments Accounting <ul><li>Anything that we buy or sell to the rest of the world must be paid for.  </li></ul>...
The Current Account <ul><li>Any transaction that represents a flow of funds out of India is represented by debit (-).  Tra...
The Indian Current Account: 2006 (in Millions of Rs.) <ul><li>Exports of Goods, Services, and Income </li></ul><ul><ul><li...
The Capital & Financial Account <ul><li>Again, any transaction that represents funds flowing into (out of) India are credi...
The Indian Capital & Financial Account: 2006 (in Millions of Rs) <ul><li>Capital Account: - Rs.  3,079  </li></ul><ul><li>...
Balance of Payments Accounting <ul><li>Consider three transactions: </li></ul><ul><ul><ul><li>Wal-Mart  buys $100M worth o...
Balance of Payments Accounts <ul><li>Current Account </li></ul><ul><li>Exports  </li></ul><ul><li>Goods:  </li></ul><ul><l...
Tsunami Relief Aid <ul><li>President Bush recently authorized $350M in aid for the Asian countries affected by the Tsunami...
Balance of Payments Accounts <ul><li>Current Account </li></ul><ul><li>Exports  </li></ul><ul><li>Goods:  </li></ul><ul><l...
Balance of Payments and Exchange Rates <ul><li>Should the Balance of Payments Accounts influence exchange rates? </li></ul...
The US BOP <ul><li>The US is running record trade deficits due to over consumption (US domestic savings is low and the gov...
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Balance of payments accounting1

  1. 1. Balance of Payments Accounting By Dr. Neelam Tandon
  2. 2. The Balance of Payments <ul><li>Recall the open economy accounting identity: Income = Expenditures </li></ul><ul><ul><ul><ul><li>Y = C + I + G + NX </li></ul></ul></ul></ul><ul><li>Trade Deficits imply NX< 0 </li></ul><ul><li>Therefore, Y- (C + I + G) = NX < 0 </li></ul><ul><li>Trade deficit countries are spending more than they earn (borrowing from the rest of the world) </li></ul>
  3. 3. Balance of Payments Accounting <ul><li>Anything that we buy or sell to the rest of the world must be paid for. </li></ul><ul><li>The current account (CA) tracks the flow of goods and services between India and the rest of the world </li></ul><ul><li>The capital & financial account tracks the payments for those goods & services (KFA) </li></ul><ul><li>CA + KFA = 0 </li></ul>
  4. 4. The Current Account <ul><li>Any transaction that represents a flow of funds out of India is represented by debit (-). Transactions that represent a flow of money into India are represented by a credit(+) </li></ul><ul><ul><li>Net Exports of Goods and Services </li></ul></ul><ul><ul><ul><li>Exports (+) </li></ul></ul></ul><ul><ul><ul><li>Imports (-) </li></ul></ul></ul><ul><ul><li>Net Income From Abroad (NFP) </li></ul></ul><ul><ul><ul><li>Income Earned by Indian nationals abroad (+) </li></ul></ul></ul><ul><ul><ul><li>Income earned by foreign nationals in India (-) </li></ul></ul></ul><ul><ul><li>Net Unilateral Transfers </li></ul></ul><ul><ul><ul><li>Payments from foreign countries (+) </li></ul></ul></ul><ul><ul><ul><li>Payments to foreign Countries (-) </li></ul></ul></ul>
  5. 5. The Indian Current Account: 2006 (in Millions of Rs.) <ul><li>Exports of Goods, Services, and Income </li></ul><ul><ul><li>Goods: Rs. 713,122 </li></ul></ul><ul><ul><li>Services: Rs. 307,381 </li></ul></ul><ul><ul><li>Income Receipts: </li></ul></ul><ul><ul><li>Investment Receipts: Rs. 291,354 </li></ul></ul><ul><ul><li>Employee Compensation: Rs. 3,031 </li></ul></ul><ul><li>Imports of Goods, Services and Income </li></ul><ul><li> Goods: - Rs. 1,260,274 </li></ul><ul><ul><li>Services: - Rs. 256,337 </li></ul></ul><ul><ul><li>Income Receipts: </li></ul></ul><ul><ul><li>Investment Receipts: - Rs. 252,573 </li></ul></ul><ul><ul><li>Employee Compensation: - Rs. 8,533 </li></ul></ul><ul><li>Net Unilateral Transfers: - Rs. 67,439 </li></ul><ul><li>Current Account : - Rs. 530,668 </li></ul>
  6. 6. The Capital & Financial Account <ul><li>Again, any transaction that represents funds flowing into (out of) India are credits (debits) in the KFA </li></ul><ul><ul><li>Financial assets </li></ul></ul><ul><ul><ul><li>Foreign acquisition of Indian assets (+) </li></ul></ul></ul><ul><ul><ul><li>Indian acquisition of foreign assets (-) </li></ul></ul></ul><ul><ul><li>Official Reserve Assets </li></ul></ul><ul><ul><ul><li>Foreign acquisition of Indian reserve assets (+) </li></ul></ul></ul><ul><ul><ul><li>Indian acquisition of foreign reserve assets (-) </li></ul></ul></ul>
  7. 7. The Indian Capital & Financial Account: 2006 (in Millions of Rs) <ul><li>Capital Account: - Rs. 3,079 </li></ul><ul><li>Indian Owned Assets Abroad (Increase/Financial Outflow (-)) </li></ul><ul><li>Indian Official Reserve Assets: Rs. 1,523 </li></ul><ul><li> Indian Government Assets: Rs. 537 </li></ul><ul><li> Indian Private Assets: - Rs. 85,574 </li></ul><ul><li>Foreign Owned Assets in India (Increase/Financial inflow (+)) </li></ul><ul><li>Foreign Official Assets in India : Rs.248,573 </li></ul><ul><li>Foreign Private Assets in the India : Rs. 580,600 </li></ul><ul><li>Capital And Financial Account: Rs.542,680 </li></ul><ul><li>CA + KFA = -Rs.530,668 + Rs.542,680 = -Rs.12,012 </li></ul>
  8. 8. Balance of Payments Accounting <ul><li>Consider three transactions: </li></ul><ul><ul><ul><li>Wal-Mart buys $100M worth of clothing from a Chinese Manufacturer. Wal-Mart pays for the clothing by writing a check drawn off its account at Bank of America. </li></ul></ul></ul><ul><ul><ul><li>Warren Buffet collects $50M in interest payments from his financial investments overseas. The Payment is made by crediting Warren’s bank account in London. </li></ul></ul></ul><ul><ul><ul><li>Microsoft sells $20M worth of software to the French government. They pay in cash. </li></ul></ul></ul>
  9. 9. Balance of Payments Accounts <ul><li>Current Account </li></ul><ul><li>Exports </li></ul><ul><li>Goods: </li></ul><ul><li>Services: </li></ul><ul><li>Imports </li></ul><ul><li>Goods: </li></ul><ul><li>Services: </li></ul><ul><li>Net Factor Income: </li></ul><ul><li>Net Unilateral Transfers: </li></ul><ul><li>CA Balance: </li></ul><ul><li>Capital & Financial Account </li></ul><ul><li>Foreign acquisition of US assets: </li></ul><ul><li>US Treasuries: </li></ul><ul><li>Private Securities: </li></ul><ul><li>FDI: </li></ul><ul><li>Currency: </li></ul><ul><li>US acquisition of foreign assets: </li></ul><ul><li>FDI: </li></ul><ul><li>Foreign Securities: </li></ul><ul><li>Official Reserve Assets </li></ul><ul><li>Foreign acquisition of US ORA: </li></ul><ul><li>US acquisition of foreign ORA: </li></ul><ul><li>KFA Balance: </li></ul>-$100M (1) $100M (1) $50 (2) -$50 (2) $20M (3) -$20M (3) -$30M $30M
  10. 10. Tsunami Relief Aid <ul><li>President Bush recently authorized $350M in aid for the Asian countries affected by the Tsunami. </li></ul><ul><ul><li>This will appear in the BOP accounts under unilateral transfers. </li></ul></ul><ul><ul><li>Assume we pay this transfer in cash (most likely we would pay by check) </li></ul></ul>
  11. 11. Balance of Payments Accounts <ul><li>Current Account </li></ul><ul><li>Exports </li></ul><ul><li>Goods: </li></ul><ul><li>Services: </li></ul><ul><li>Imports </li></ul><ul><li>Goods: </li></ul><ul><li>Services: </li></ul><ul><li>Net Factor Income: </li></ul><ul><li>Net Unilateral Transfers: -$350M </li></ul><ul><li>CA Balance: -$350M </li></ul><ul><li>Capital & Financial Account </li></ul><ul><li>Foreign acquisition of US assets: </li></ul><ul><li>US Treasuries: </li></ul><ul><li>Private Securities: </li></ul><ul><li>FDI: </li></ul><ul><li>Currency: $350M </li></ul><ul><li>US acquisition of foreign assets: </li></ul><ul><li>FDI: </li></ul><ul><li>Portfolio Investment: </li></ul><ul><li>Official Reserve Assets </li></ul><ul><li>Foreign acquisition of US ORA: </li></ul><ul><li>US acquisition of foreign ORA: </li></ul><ul><li>KFA Balance: $350 </li></ul>
  12. 12. Balance of Payments and Exchange Rates <ul><li>Should the Balance of Payments Accounts influence exchange rates? </li></ul><ul><ul><li>A BOP deficit (surplus) indicates that financial assets flowing out of (into a) country. Shouldn’t that indicate a currency depreciation? </li></ul></ul><ul><ul><li>No really….the balance of payments is an accounting statement. Given the pattern of exchange rates, the BOP indicates the transactions that took place (Remember, by definition, BOP=0) </li></ul></ul>
  13. 13. The US BOP <ul><li>The US is running record trade deficits due to over consumption (US domestic savings is low and the government deficit is large) </li></ul><ul><li>Unlike past years, this trade deficit is NOT being financed by foreign private investment in the US, but rather by central banks purchasing US government debt…..this is potentially troubling! </li></ul>

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