MBA Gl

Global
b l Economy
E

Balance of Payments

1 Professor Augustine H H Tan MBA Global Economy Session 5-09

 Balance
l off Payments
y A record of international transactions between residents
of one country and the rest of the world
y International transactions include exchanges of goods,
services or assets
y “Residents” means businesses, individuals and
government agencies, including citizens temporarily
living abroad but excluding local subsidiaries of foreign
corporations

2 Professor Augustine H H Tan MBA Global Economy Session 5-09

 D bl tr accounting
Double-entry ti ini the
th BOP
y All transactions are either debit or credit
ttransactions
ti
y Credit transactions result in receipt of payment
from abroad
y Merchandise exports
y Transportation and travel receipts
y Income received from investments abroad
y Gifts received from foreign residents
y Aid received from foreign governments
y Local investments by overseas residents

3 Professor Augustine H H Tan MBA Global Economy Session 5-09

 D bl tr accounting
Double-entry ti (cont’d)
y Debit transactions lead to payments to foreigners
y Merchandise imports
y Transportation and travel expenditures
y Income paid on investments of foreigners
y Gifts to foreign residents
y Aid g
given by
y home g
government
y Overseas investments by home country
residents
y Each
E h credit
dit transaction
t ti has
h a balancing
b l i debit
d bit
transaction, and vice versa, so the overall balance
of p
payments
y is always
y in balance

4 Professor Augustine H H Tan MBA Global Economy Session 5-09

 Balance-of-Payments Accounts

y Current Account
y Measures the flow of g
goods,, services,, income,, and
transfers or gifts between domestic residents,
businesses, and governments and the rest of the
world.
y Goods: imports and exports of tangible goods.
y Services: imports and exports of services, tourism
and travel,
travel and military transactions
transactions.
y Income: interest and dividend payments to foreign
holders of domestic financial assets.
y Unilateral
U il t l transfers:
t f international
i t ti l transfers,
t f or
gifts, between individuals and governments.

5 Professor Augustine H H Tan MBA Global Economy Session 5-09

 Balance-of-Payments Accounts …….

y Capital & Financial Account

y A tabulation of the flows of financial assets between

domestic private residents and businesses and foreign
private residents and businesses.
y Includes three categories of financial assets:
y Financial assets of the domestic government
y Private domestic financial assets
y Foreign
F i financial
fi i l assets.
t
y Tabulates two types of asset flows
y Investment flows and changes in banks’ and brokers’
cash deposits that arise from foreign transactions.

6 Professor Augustine H H Tan MBA Global Economy Session 5-09

 The Official Settlements Balance

y Official Settlements Balance

y A balance-of-payments account that tabulates
transactions of reserve assets by official
government agencies.
y Official assets:
y Gold and foreign currencies
y Special Drawing Rights at the International
Monetary Fund
y Other government assets.
assets

7 Professor Augustine H H Tan MBA Global Economy Session 5-09

 Deficits and Surpluses in the Balance of Payments

y Statistical Discrepancy
y An offsetting entry in the balance of payments if
the sum of the credits and debits in the current
account, private capital account, and official
settlements is not zero.
y Overall Balance of Payments
y The sum of the credits and debits in the current
account, capital account, official settlements, and
the statistical discrepancy.

8 Professor Augustine H H Tan MBA Global Economy Session 5-09

 Deficits and Surpluses in the Balance of Payments….

y Balance-of-Payments Deficit
y The sum of the credits and debits in the current
account and the private capital account is
negative.
negative
y Balance-of-Payments Surplus
y A situation where the sum of the debits and
credits in the current and private capital account
is positive.
y Balance
Balance-of-Payments
of Payments Equilibrium
y A situation where the sum of the debits and
credits in the current account and the private
capital account is zero.
zero
9 Professor Augustine H H Tan MBA Global Economy Session 5-09
 Other Deficit and Surplus Measures

y Balance on Merchandise Trade

y The sum of the debit and credit entries in the
merchandise or goods category.
y Balance on Goods,
Goods Services,
Services and Income
y The sum of the debit and credit entries that
appear in the merchandise, service, and income
categories.
y Balance on the Current Account
y The sum of all the debit and credit entries in the
categories of goods, services, income, and
unilateral transfers.

10 Professor Augustine H H Tan MBA Global Economy Session 5-09

 Other Deficit and Surplus Measures ….

y Balance on the Capital & Financial Account

y The net inflow or outflow of capital (financial
assets) purchased by private domestic and
foreign residents.

11 Professor Augustine H H Tan MBA Global Economy Session 5-09

Structure of the Balance of Payments

C rr t accountt
Current
y Goods and services balance
y Merchandise trade balance
y Services balance
y Investment income (net)
y Unilateral transfers
y Private transfer payments
y Governmental transfers

12 Professor Augustine H H Tan MBA Global Economy Session 5-09

Structure of the Balance of Payments

C it l andd financial
Capital fi i l accountt
y All purchases or sales of assets, including:
y Direct investment
y Securities (debt)
y Bank claims and liabilities
y Official settlements transactions

13 Professor Augustine H H Tan MBA Global Economy Session 5-09

Current account

C rr t accountt surplus
Current r l andd deficit
d fi it
y Current account and capital & financial account
balance each other; when one is in surplus the
other must be in deficit
y Current account surplus means exports of goods
and
d services,
i investment
i t t income
i and
d transfers
t f
exceed imports and outflows: net lending abroad
(capital outflow)
y Current account deficit means imports of goods
and services, and outflows are greater than
exports
p and inflows;; must be financed byy
borrowing (capital account inflows)

14 Professor Augustine H H Tan MBA Global Economy Session 5-09

The Current Account
Y=C+I+G+X-M
Y = GNP C = Consumption G = Government
Expenditure
CA = X - M > 0, Surplus [Lending Abroad]

< 0, Deficit [Borrowing From Abroad]

CA = Y - [C + I + G]

S=Y-C-G

S = I + CA;; CA = S - I > 0 [[Lending

g Abroad]]
< 0 [Borrowing From Abroad]
15 Professor Augustine H H Tan MBA Global Economy Session 5-09
 Current Account: Government Taxes & Expenditure

S = Y - C - G = [Y - T - C] + [T - G]

S = PS + GS PS=Private Saving
GS=Government Saving
S = I + CA = PS + GS

CA = PS - I + T - G

CA = [PS - I] + [T - G]

16 Professor Augustine H H Tan MBA Global Economy Session 5-09

US Balance of Payments
Payments, 2003 ($ bill.)

Professor Augustine H H Tan MBA Global

17 Economy Session 5-09
 US Balance of Payments,
y , 2003 (($ bill.))
Current account (cont’d)
Income receipts & payments
investment income, net 21.9
employee compensation -5.3
53
All income, net 16.6
Unilateral transfers,, net
US Government grants -21.8
US Government pensions -5.3
Private remittances -41.1
All unilateral transfers -68.2
Balance on current account $-541.8

Professor Augustine H H Tan MBA Global

18 Economy Session 5-09
 US Balance of Payments,
Payments 2003 ($ bill.)
Capital
p & financial account
Capital account transactions, net -3.1
Financial account transactions, net 579.0
Statistical discrepancy -34.1
Balance on capital &
financial account $541.8

Professor Augustine H H Tan MBA Global

19 Economy Session 5-09
Balance of Payments

US Balance
B l off P
Payments 1970
1970-2001
2001

20 Professor Augustine H H Tan MBA Global Economy

Balance of Payments

T d balances
Trade b l & growth,
h 1992-7

21 Professor Augustine H H Tan MBA Global Economy Session 5-09

Balance of Payments

Current account deficit

d f a problem?
bl
y Current account deficit has little to do with foreign
ttrade
d practices
ti or competitiveness
titi
y Determined mostly by domestic macro-economic
conditions that cause demand to exceed supply
and increase imports (paid for with borrowing)
y Whether a current account deficit is good or bad
depends on whether the borrowed funds
f are used
to pay for consumption or investment

22 Professor Augustine H H Tan MBA Global Economy Session 5-09

 Singapore’s Current Account

SINGAPORE 1993

CA = $8,358 million
I [[Gross Capital
p Formation]] = $35,441
, million

G-T = -$5,531 million [Government]

-$2,192
$2 192 million [Statutory Boards]
-$7,723 million
Gross National Savings [GNS] = $43,799
PS = GNS - [G-T] = $36,076 million

Economic Survey of Singapore 1994, Table A1.8

23 Professor Augustine H H Tan MBA Global Economy Session 5-09

 SINGAPORE: BALANCE OF PAYMENTS 1993
Million $
Trade Balance -8,071
8 071
Balance of Services 17,458
Goods & Services 9,387
Current Account 8 358
8,358
Capital [net] 8,904
Non- Monetary 4,512
Monetary 4 391
4,391
Basic Balance 11,204
Balancing Item -5,108
Overall Balance 12 154
12,154
Official Reserves [net] -12,154
Economic Survey of Singapore 1994

24 Professor Augustine H H Tan MBA Global Economy Session 5-09

Balance of Payments

Balance
l off internationall indebtedness
db d
y Summarizes one nation’s overall quantity of
assets
t andd liabilities
li biliti against
i t the
th restt off the
th world
ld
y Shows whether the nation is a net debtor or a net
creditor
y Indicates sensitive items, such as short term debt
held by foreigners which could be liquidated
quickly, straining finances
f

25 Professor Augustine H H Tan MBA Global Economy Session 5-09