Transcript Document

The Balance
of Payments
Chapter Three
3
INTERNATIONAL
FINANCIAL
MANAGEMENT
Chapter Objective:
This chapter 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
Chapter 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
McGraw-Hill/Irwin
3-1
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Balance of Payments Accounting

The Balance of Payments is the statistical record
of a country’s international transactions over a
certain period of time presented in the form of
double-entry bookkeeping.
N.B. when we say “a country’s balance of
payments” we are referring to the transactions of
its citizens and government.
McGraw-Hill/Irwin
3-2
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
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
Maplewood’s bank account.
This will lead to a rise in the supply of
dollars and the demand for British pounds.
McGraw-Hill/Irwin
3-3
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
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
McGraw-Hill/Irwin
3-4
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
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.
McGraw-Hill/Irwin
3-5
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
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 surplus—absent 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.
McGraw-Hill/Irwin
3-6
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Statistical Discrepancy


There’s going to be some omissions and
misrecorded transactions—so we use a “plug”
figure to get things to balance.
Exhibit 3.1 shows a discrepancy of $96.76 billion
in 1997.
McGraw-Hill/Irwin
3-7
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
The Official Reserves Account

Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF.
McGraw-Hill/Irwin
3-8
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
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
McGraw-Hill/Irwin
3-9
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
$1,167.61
($1,295.53)
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
McGraw-Hill/Irwin
3-10
($96.76)
$1.02
($1.02)
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
$1,167.61
($1,295.53)
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
McGraw-Hill/Irwin
3-11
($96.76)
In 1997, the
U.S. imported
more than it
exported, thus
running a
current account
deficit of
$166.8 billion.
$1.02
($1.02)
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
$1,167.61
($1,295.53)
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
McGraw-Hill/Irwin
3-12
($96.76)
$1.02
($1.02)
During the same
year, the U.S.
attracted net
investment of
$264.58
billion—clearly
the rest of the
world found the
U.S. to be a
good place to
invest.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
$1,167.61
($1,295.53)
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
McGraw-Hill/Irwin
3-13
Under a pure
flexible
exchange rate
regime, these
numbers would
balance each
other out.
($96.76)
$1.02
($1.02)
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
$1,167.61
($1,295.53)
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
McGraw-Hill/Irwin
3-14
In the real
world, there
is a statistical
discrepancy.
($96.76)
$1.02
($1.02)
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
$1,167.61
($1,295.53)
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
Including that,
the balance of
payments identity
should hold:
BCA + BKA = - BRA
($96.76)
$1.02
($1.02)
($166.80) + $264.58 + ($96.76) = $1.02= –($1.02)
McGraw-Hill/Irwin
3-15
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Balance of Payments and the
Exchange Rate
Credits
Debits
Current Account
1
Exports
2
Imports
Unilateral Transfers
Balance on Current Account
Capital Account
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
McGraw-Hill/Irwin
S
($1,295.53)
3
4
5
6
P
$1,167.61
3-16
D
($96.76)
$1.02
($1.02)
Q
Exchange rate $
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Balance of Payments and the
Exchange Rate
Credits
Debits
Current Account
1
Exports
2
Imports
S
($1,295.53)
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
P
$1,167.61
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
D
($96.76)
$1.02
($1.02)
Q
Exchange rate $
As U.S. citizens import, they are supply dollars to the FOREX market.
McGraw-Hill/Irwin
3-17
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Balance of Payments and the
Exchange Rate
Credits
Debits
Current Account
1
Exports
2
Imports
S
($1,295.53)
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
P
$1,167.61
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
D
($96.76)
$1.02
($1.02)
Q
Exchange rate $
As U.S. citizens export, others demand dollars at the FOREX market.
McGraw-Hill/Irwin
3-18
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Balance of Payments and the
Exchange Rate
Credits
Debits
Current Account
1
Exports
2
Imports
($1,295.53)
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
P
$1,167.61
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
SS
1
D
($96.76)
$1.02
($1.02)
Q
Exchange rate $
As the U.S. government sells dollars, the supply of dollars increases.
McGraw-Hill/Irwin
3-19
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
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.
McGraw-Hill/Irwin
3-20
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Balance of Payments Trends
200
150
100
50
Current Account
0
Capital Account
-50
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
Balance of Payments ($b)
U.S. Balance of Payments Trends
-100
-150
-200
Year
McGraw-Hill/Irwin
3-21
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Balance of Payments Trends
150
100
50
Current Account
0
Capital Account
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
Balance of Payments ($b)
Japan's Balance of Payments Trend
-50
-100
-150
Year
McGraw-Hill/Irwin
3-22
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Balance of Payments Trends




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.
McGraw-Hill/Irwin
3-23
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
Balance of Payments Trends
Germany's Balance of Payments Trend
60
40
20
Current Account
0
Capital Account
-20
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
Balance of Payments ($b)
80
-40
-60
-80
Year
McGraw-Hill/Irwin
3-24
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights
End Chapter Three
McGraw-Hill/Irwin
3-25
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights