Balance of Payments
Balance of Payments
• Balance of Payments records a country’s
international transactions
• Transactions can be between
gov...
Current Account
• An important long run and comprehensive measure of
country’s transaction with the rest of the world
• Co...
Current Account
• Trade in services includes freight, passenger
fares, royalties, fees, tourism
• Other important componen...
Capital Account
• Capital Account shows transactions in real or
financial assets between countries
–
–
–
–

Purchase of re...
External account must balance
• Payments to abroad=receipts from abroad
• Current account deficit has to be compensated wi...
External account must balance
• Increase in official reserves is called balance
of payments surplus
• Balance of payments ...
Importance
• Balance of payments data influence the
exchange rates and government policy
• Corporate monitor Balance of Pa...
Balance of payment
Debits (+)
Credits (-)
Current Account
Export of goods Services
Income receipts
Import of goods and Ser...
Balance of payment
Debits (+)
Credits (-)
Current Account
Export of goods Services
Income receipts
Import of goods and Ser...
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Balance of payments

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Balance of payments

  1. 1. Balance of Payments
  2. 2. 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
  3. 3. 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)
  4. 4. 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.
  5. 5. 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)
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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

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