Transcript The Balance of Payments

The Balance of
Payments
Basic Facts
BALANCE OF PAYMENTS
ACCOUNTS
CREDIT ITEMS
(MONEY IN)
DEBIT ITEMS
(MONEY OUT)
CA
EXPORTS
IMPORTS
KA
CAPITAL
INFLOW
CAPITAL
OUTFLOW
Current & Capital Accounts
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Balance of Payments =
Balance on Current Account +
Balance on Capital Account
In short: BOP = CA + KA = 0
Therefore, CA = - KA
Except for statistical discrepancies
Current Account
Merchandise trade
balance
Service trade balance
Net investment income
Unilateral transfers
Capital Account
 Because
KA = - CA, the huge
CA surpluses of Japan &
Europe are matched by huge
KA deficits
 The US has a huge KA surplus
Capital Account
Two major categories
 Portfolio investment: short-term
capital, bonds, securities, equity
or stocks if no control involved
 Direct investment: equity if it
involves some control of the
company
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Current Situation
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Large capital account surpluses in
the USA (and China) reflect high
rates of return on capital and/or
relatively low risk
The USA and China are attractive as
destinations for capital investments
relative to Europe and Japan
Vietnam?
Pre-Crisis Southeast Asia
Rapid economic growth => large
KA surpluses
 CA deficits equally large
 Currency pegs to $US difficult,
ultimately impossible to sustain
 High interest rates attracted
even more capital
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Why?
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Capital inflow => rapid money supply
growth
Money supply growth => inflation &
currency depreciation
Anti-inflation/depreciation policies limit M
growth, but => higher interest rates
Higher interest rates attract even more
capital