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Balance of PaymentsBalance of PaymentsEconomicsEconomics

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Wh

at is it?Wh

at is it?

Accounting of a Countrys Trade

Economics + Accounts

Annual Report of a Countrys Performance

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Accounting PrinciplesAccounting Principles

Balance of Payment = Zero

Net Exports = Exports - Imports

Similarly, Net Capital Outflow

Two Main Divisions-

Current Account

Capital Account

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Current AccountCurrent Account

Goods

Services

Income- from Investments eg. Dividend Incomefor use of Capital/Any other Factor of Production

by another Country - No claims

Current transfers- eg. Foreign Aid, Remittances

Net Change in Claims on the Outside World,which is recorded on the Capital & Financial A/c

}Trade Balance

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Capital AccountCapital Account

Actually it is Capital & Financial Account

Asset related transactions

Increase in claims on foreigners- Capital outflow

Increase in claims by foreigners- Capital inflow

If Claim > 1 year = Long-term Capital eg. FDI

Changes in Reserve Assets of Country byCentral Bank eg. Gold Stocks, IMF Credits,SDRs, Forex Reserves

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Financial AccountFinancial Account

Direct Investment

Portfolio Investment

Other Investment

Reserve Assets

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Voting Power in IMFVoting Power in IMF

Control of IMF funds give industrialized countries leverage in economic policymaking decisions outside of their own national borders, and are used inpart to bail out private international banks that invest in risky segments of the developing world.

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Current & CapitalCurrent & Capital

Current account balance + Capital accountbalance = zero

Current account surplus = Net Capital &

Financial Outflow

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Some takes...Some takes...

USA- which used to be a net creditor, has

accumulated large current account deficitsover the last two decades, which is now theworlds largest debtor!

Reasons- Iraq War, Expansionist Policy ofBush which has led to huge defense budgets &tax reductions etc.

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Some takes...Some takes...Japan on the other hand is having a currentsurplus, thus becoming a large creditor!

Netherlands is consistently accumulating &Australia borrowing

Malaysia & Philippines were borrowing on largescale in 1990s, to finance the rapiddevelopment. There was an abrupt break in thecapital inflow as a result due to Asian Crisis dueto which both countries had to repay part of theirdebt

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Nation & FirmNation & Firm

Noreena Hertz & Naomi Klein in 2001 were

critical of the globalization process and theever-increasing power of multi-nationalcompanies, arguing that large companies likeWal-Mart (Sales $165bn in 2000) are more

powerful th

an entire nations like Czech

Republic (GDP $51bn) or Pakistan (GDP$62bn)

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Classic MistakeClassic Mistake

Countries are sovereign states

Ability to pass laws/regulations, impose taxes

Organize Police, Justice & Defense system

Sales Revenue does not measure productionvalue of that company, whereas GDP does.Profit ofWal-Mart @ 21.42% = $35bn

GDP should be adjusted for PPP for RealValue

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The EndThe End