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Balance of Payment
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Balance of Payments
Balance of Payments
A system of accounts that measures transaction of
goods, services, income, and financial assets
between domestic residents, businesses, and
governments and the rest of the world during aspecific time period.
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Introduction
Balance of payments
Record of the economic transactions between the
residents of one country and the rest of the world
International transaction
Exchange of goods, services, or assets between
residents of one country and those of another
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Double-Entry Accounting
Arrangement of international transactions intoa balance-of-payments account
Credit: Receipt of a payment from foreigners
Debit: Payment to foreigners
Balance-of-payments accounts utilize a
double-entry accounting system
Total balance-of-payments account must balance
Subaccounts may not balance Surplus occurs when the balance is positive
Deficit occurs when the balance is negative
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BOP Statements and Accounting
Double-Entry accounting is used.
Balance of payments may not balance - individual
transactions are recorded independently and double-entry accounting is used in theory only.
Will be balanced by the net errors and omissions
account.
Cash flow statement dominated by two types of
business transactions -
Real assets
Financial assets
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Balance-of-Payments Structure:
Current Account
Monetary value of international flowsassociated with transactions Merchandise trade
Merchandise trade balance: Combining the exports and
imports of goods Exports and imports of services
Goods and services balance
Add services to the merchandise trade account
Income receipts and payments
Unilateral transfers Private transfer payments
Governmental transfers
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Capital and Financial Account
All international purchases or sales of assets Includes both private-sector and official transactions
Capital transactions
Capital transfers
Acquisition and disposal of certain nonfinancial assets
Private-sector financial transactions
Direct Investment
Securities
Bank Claims and Liabilities
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Capital and Financial Account Financial inflows and outflows
A capital (financial) inflow can be likened to theexport of goods and services
A capital (financial) outflow is similar in effect to the
import of goods and services. Official settlements transactions
Movement of financial assets among official holders Official reserve assets
Liabilities to foreign official agencies
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Balance-of-Payments Accounts
Current Account Measures the flow of goods, services, income, and
transfers or gifts between domestic residents,
businesses, and governments and the rest of the
world. Goods: imports and exports of tangible goods.
Services: imports and exports of services, tourism and
travel, and military transactions.
Income: interest and dividend payments to foreign holders
of domestic financial assets.
Unilateral transfers: international transfers, or gifts,
between individuals and governments.
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610
Balance-of-Payments Accounts
(contd)
Capital AccountA tabulation of the flows of financial assets between
domestic private residents and businesses and
foreign private residents and businesses.
Includes three categories of financial assets: Financial assets of the domestic government
Private domestic financial assets
Foreign financial assets.
Tabulates two types of asset flows Investment flows and changes in banks and brokers cash
deposits that arise from foreign transactions.
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Deficits and Surpluses in the Balance
of Payments (contd)
Balance-of-Payments Deficit
The sum of the credits and debits in the current
account and the private capital account is negative.
Balance-of-Payments SurplusA situation where the sum of the debits and credits in
the current and private capital account is positive.
Balance-of-Payments Equilibrium
A situation where the sum of the debits and credits inthe current account and the private capital account is
zero.
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What does a Current Account Deficit
(Surplus) Mean?
Total debits will always equal total credits If the current account registers a deficit, the capital
and financial account must register a surplus, or net
capital/financial inflow
If the current account registers a surplus, the capitaland financial account must register a deficit, or net
capital/financial outflow
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Net Foreign Investment and the
Current Account Balance
Current account balance
Synonymous with net foreign investment in national
income accounting
Current account surplus - net supplier of funds
Current account deficit - net demander of funds
Net borrowing of the nation:
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Impact of Financial Flows on the
Current Account
Capital and financial flows may initiate changes inthe current account
Countrys current account deficit can be caused by
a net financial inflow to the Country
Appreciating dollar makes imports cheaper and exportscostly
Declining exports and increasing imports results in a rise in
the current account deficit, or a decline in the current
account surplus
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Is a Current Account Deficit a
Problem?
Benefit of a current account deficitAbility to push current spending beyond current
production
Cost of debt service
Debt: Good or bad for a nation? Is the deficit used to finance more consumption or more
investment?5
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Business Cycles, Economic Growth,
and the Current Account
Current account and economic performance Rapid growth of production and employment:
Large or growing trade and current account deficits
Slow output and employment growth
Large or growing surpluses
Holds for both short-term and long-term
Economic growth, employment growth, and trade
balances
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International Economic Crisis Path
Country has Current
Account deficit and
a Financial Account
surplus
Capital acts as
financing for
growingmerchandise/service
s deficits
Event questions
countrys economic
stability- investorswithdraw capital
rapidly
Capital flight
causes loss of
financial account
surplus - deficit in
overall balance of
payments results
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Recession or depression.
Reduction in world demand for
products.
World markets suffer severe pricereductions as demand falls.
Declining earnings and growth
prospects for other emerging
economies.
Global Effects of Economic Crisis
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