Transcript Slide 1

Chapter 2
Chapter Objective:
This chapter introduces you to the concept and practice
of balance of payments:
1. how it is constructed and
2. how balance of payments data
may be interpreted.
Poorna Pal, MS MBA Ph.D.
Chapter 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
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.
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.
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
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.
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.
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.
The Official Reserves Account
Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF.
Forex - Top 10 central banks with biggest reserves
BALANCE OF PAYMENTS AND BOP THEORYECONOMIC THEORIES AND MODELS. Check
out the entire free forex course (in process):
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
U.S. Balance of Payments Data
US Bureau of Economic Analysis data
Source of US economic statistics including national income
and product ... Access International Economic Accounts
Data. Balance of Payments · Trade in Goods ...
www.bea.gov/
International Trade and Balance of Payments: Statistics Portal ...
of goods and services (millions $US) Source: OECD Main
Economic ...
www.oecd.org/.../0,3398,en_2825_495663_1_1_1_1_1,00.html
Balance of Payments and International Investment Position
Statistics
Oct 4, 2010 ... Statistical Publications—where to obtain IMF data on
balance of payments and IIP statistics. Metadata including ...
www.imf.org/redirect/?URL=$V:?404;http://www.imf.org:80/
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
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
$1,167.6
1
($1,295.53)
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
($96.76)
$1.02
($1.02)
In 1997, the
U.S. imported
more than it
exported, thus
running a
current account
deficit of
$166.8 billion.
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
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
$1,167.6
1
($1,295.53)
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
($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.
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
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
$1,167.6
1
($1,295.53)
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
($96.76)
$1.02
($1.02)
Under a pure
flexible
exchange rate
regime, these
numbers would
balance each
other out.
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
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
$1,167.6
1
($1,295.53)
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
($96.76)
$1.02
($1.02)
In the real
world, there
is a statistical
discrepancy.
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
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
$1,167.6
1
($1,295.53)
$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)
Balance of Payments and the Exchange
Rate
Credits
Debits
Current Account
1
Exports
2
Imports
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
$1,167.6
1
P
($1,295.53)
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
S
D
($96.76)
$1.02
($1.02)
Q
Exchange rate $
Balance of Payments and the Exchange
Rate
Credits
Debits
Current Account
1
Exports
2
Imports
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
$1,167.6
1
P
($1,295.53)
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
S
D
($96.76)
$1.02
($1.02)
Q
Exchange rate $
As U.S. citizens import, they are supply dollars to the FOREX market.
Balance of Payments and the Exchange
Rate
Credits
Debits
Current Account
1
Exports
2
Imports
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
$1,167.6
1
P
($1,295.53)
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
S
D
($96.76)
$1.02
($1.02)
Q
Exchange rate $
As U.S. citizens export, others demand dollars at the FOREX market.
Balance of Payments and the Exchange
Rate
Credits
Debits
Current Account
1
Exports
2
Imports
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
$1,167.6
1
P
($1,295.53)
$6.13
($45.01)
($166.80)
$107.93
$387.62
$194.95
$264.58
($119.44)
($79.28)
($227.2)
7
S
S1
D
($96.76)
$1.02
($1.02)
Q
Exchange rate $
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.
Balance of Payments Trends
Balance of Payments ($b)
U.S. Balance of Payments Trends
200
150
100
50
Current Account
0
-50 82
19
-100
84
9
1
86 988
9
1
1
90
9
1
-150
-200
Year
92
9
1
94 996
9
1
1
Capital Account
Balance of Payments Trends
Balance of Payments ($b)
Japan's Balance of Payments Trend
150
100
50
Current Account
0
2
-5098
1
84
9
1
86 988
9
1
1
90
9
1
-100
-150
Year
92
9
1
94 996
9
1
1
Capital Account
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.
Balance of Payments Trends
Germany's Balance of Payments Trend
Balance of Payments ($b)
80
60
40
20
Current Account
0
-20 82
19
-40
84
9
1
86
9
1
88
9
1
90
9
1
-60
-80
Year
92
9
1
94
9
1
96
9
1
Capital Account