03 Balance of Payments

The Balance of Payments
Lecture Objective:
INTERNATIONAL FINANCIAL MANAGEMENT
This lecture serves to introduce the student to the balance of payments. How it is constructed and how balance of payments data may be interpreted.
EUN / RESNICK
Second Edition
Lecture Three Outline

Balance of Payments Accounting Balance of Payments Accounts

The Current Account The Capital Account Statistical Discrepancy Official Reserves Account
The Balance of Payments Identity Balance of Payments Trends in Major Countries
3-1
Balance of Payments Accounting

The Balance of Payments is the statistical record
of a countrys international transactions over a certain period of time presented in the form of double-entry bookkeeping. E.g. export and imports; cross border investments in bonds, stocks, real estate etc Note: When we say a countrys balance of payments we are referring to the transactions of its citizens and government.
3-2
When exports are more than imports, currency
appreciates and vice versa If BOP is adverse other countries may not want to do business with you; country will be forced to restrict imports and arrest capital outflows BOP data can be used to evaluate the performance of the country in international economic competition
3-3
Receipts from foreigners are recorded as a credit
with a positive sign Payments are recorded as a debit with a negative sign
3-4
Balance of Payments Example

Suppose that Maplewood Bicycle in Maplewood
Missouri, USA imports $100,000 worth of bicycle frames from Mercian Bicycles in Darby England. There will exist a $100,000 credit recorded by Mercian that offsets a $100,000 debit at Maplewoods bank account. This will lead to a rise in the supply of dollars and the demand for British pounds.
3-5
Balance of Payments Accounts

The balance of payments accounts are those that
record all transactions between the residents of a country and residents of all foreign nations. They are composed of the following:
The Current Account The Capital Account Statistical Discrepancy The Official Reserves Account
3-6
The Current Account

Includes all imports and exports of goods and
services. Includes unilateral transfers of foreign aid. If the debits exceed the credits, then a country is running a trade deficit.
3-7
Current account
Merchandise trade: exports and imports of goods
like wheat, rice, computers etc; trade balance is the difference between exports and imports; Japan, Germany have trade surplus whereas the US has deficit Services: payments and receipts for legal, consulting, engineering services, royalties for patents
3-8
Factor Income: Payments and receipts of interest,
dividends, other income on foreign investments Receipts are credits and payments are debits Unilateral transfers: Foreign aid, official and private grants, gifts One directional flow; country making payment will receive goodwill in return
3-9
When currency depreciates, exports rise and
imports fall J curve effect: Trade balance deteriorates for some time and then improves J Curve effect exists in 40% of cases involving currency devaluation
3-10
The Capital Account

The capital account measures the difference
between U.S. sales of assets to foreigners and U.S. purchases of foreign assets. The U.S. enjoys about a $150,000,000,000 capital account surplusabsent of U.S. borrowing from foreigners, this finances our trade deficit. The capital account is composed of Foreign Direct Investment (FDI), portfolio investments and other investments.
3-11
FDI: Setting up of capital projects, acquisitions Portfolio Investment: Sales and purchases of
foreign financial assets Other Investment: transactions in bank deposits, trade credits, transactions in currency
3-12
Statistical Discrepancy
Theres going to be some omissions and
misrecorded transactionsso we use a plug figure to get things to balance. Exhibit 3.1 shows a discrepancy of $96.76 billion in 1997.
3-13
The Official Reserves Account

Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF. When a country must make a net payment to foreigners because of a BOP deficit the central bank either should run down its official reserves or borrow anew
3-14
The Balance of Payments Identity

BCA + BKA + BRA = 0
where BCA = balance on current account BKA = balance on capital account BRA = balance on the reserves account
Under a pure flexible exchange rate regime, BCA + BKA = 0
3-15
U.S. Balance of Payments Data

Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account

3-16

$107.93 $387.62 $194.95 $264.58

3-17
In 1997, the U.S. imported more than it exported, thus running a current account deficit of $166.8 billion.

$107.93 $387.62 $194.95 $264.58

3-18
During the same year, the U.S. attracted net investment of $264.58 billionclearly the rest of the world found the U.S. to be a good place to invest.

$107.93 $387.62 $194.95 $264.58
Under a pure flexible exchange rate regime, these numbers would balance each other out.

3-19

In the real world, there is a statistical discrepancy.
$107.93 $387.62 $194.95 $264.58

3-20

Including that, the balance of payments identity should hold:

BCA + BKA = - BRA
$107.93 $387.62 $194.95 $264.58

3-21
($166.80) + $264.58 + ($96.76) = $1.02= ($1.02)
Balance of Payments and the Exchange Rate

$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $

3-22

$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $

3-23
As U.S. citizens import, they are supply dollars to the FOREX market.

$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $

3-24
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

SS
$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $

3-25
As the U.S. government sells dollars, the supply of dollars increases.
Balance of Payments Trends

Since 1982 the U.S. has experienced continuous
deficits on the current account and continuous surpluses on the capital account. During the same period, Japan has experienced the opposite.
3-26
U.S. Balance of Payments Trends

200 150 100 50 0 -100 -150 -200 Year -50 Current Account Capital Account
Balance of Payments ($b)
3-27
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96
Japan's Balance of Payments Trend

150 100 50 0 -50 -100 -150 Year Current Account Capital Account
3-28
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96

Germany traditionally had current account
surpluses. Since 1991 Germany has been experiencing current account deficits. This is largely due to German reunification and the resultant need to absorb more output domestically to rebuild the former East Germany. What matters is the nature and causes of the disequilibrium.
3-29
Germany's Balance of Payments Trend

80
60 40 20 0 -40 -60 -80 Year Current Account Capital Account -20
3-30
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96

03 Balance of Payments

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

03 Balance of Payments

Uploaded by

Copyright:

Available Formats

The Balance of Payments

INTERNATIONAL FINANCIAL MANAGEMENT

Lecture Three Outline

The Balance of Payments Identity Balance of Payments Trends in Major Countries

Balance of Payments Accounting

When exports are more than imports, currency

Receipts from foreigners are recorded as a credit

Balance of Payments Example

Balance of Payments Accounts

The Current Account

Factor Income: Payments and receipts of interest,

When currency depreciates, exports rise and

The Capital Account

The Official Reserves Account

The Balance of Payments Identity

Under a pure flexible exchange rate regime, BCA + BKA = 0

U.S. Balance of Payments Data

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

U.S. Balance of Payments Data

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

U.S. Balance of Payments Data

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

U.S. Balance of Payments Data

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

U.S. Balance of Payments Data

In the real world, there is a statistical discrepancy.

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

U.S. Balance of Payments Data

Including that, the balance of payments identity should hold:

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

($166.80) + $264.58 + ($96.76) = $1.02= ($1.02)

Balance of Payments and the Exchange Rate

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

Balance of Payments and the Exchange Rate

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

Balance of Payments and the Exchange Rate

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

Balance of Payments and the Exchange Rate

$107.93 $387.62 $194.95 $264.58

Statistical Discrepancies Overall Balance Official Reserve Account

As the U.S. government sells dollars, the supply of dollars increases.

Balance of Payments Trends

Balance of Payments Trends

U.S. Balance of Payments Trends

Balance of Payments ($b)

Balance of Payments Trends

Japan's Balance of Payments Trend

Balance of Payments ($b)

Balance of Payments Trends

Balance of Payments Trends

Germany's Balance of Payments Trend

Balance of Payments ($b)

60 40 20 0 -40 -60 -80 Year Current Account Capital Account -20

You might also like