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³The 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.´
A country¶s balance of payment refers to
the transactions of its citizens and
government.
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ã The BOP is determined by the

country's exports and imports of
goods, services, and financial
capital, as well as financial
transfers.
ã It reflects all payments and
liabilities to foreigners (debits) and
all payments and obligations
received from foreigners (credits).
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ã The balance, like other accounting
statements, is prepared in a single
currency, usually the domestic. Foreign
assets and flows are valued at the
exchange rate of the time of transaction.
ã Balance of payments is one of the major
indicators of a country's status in
international trade, with net capital
outflow
Sp 
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p

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ã The balance of payments accounts are
those that record all transactions between
the residents of a country and residents
of all foreign nations.
ã They are composed of the following:
The Current Account
The Capital Account
The Official Reserves Account
Statistical Discrepancy
 

ã It is the sum of the balance of trade
(exports minus imports of goods and
services), net factor income (such as
interest and dividends) and net transfer
payments (such as foreign aid).
ã A current account surplus increases a
country's net foreign assets by the
corresponding amount, and a current
account deficit does the reverse.

p

 
ã It is called the current account because goods and
services are generally consumed in the current
period
ã The þ

 is the difference between a
nation's exports of goods and services and its
imports of goods and services, if all financial
transfers, investments and other components are
ignored. A nation is said to have a trade deficit if
it is importing more than it exports.
ã The    or income account, a
sub-account of the current account, is usually
presented under the headings á


as outflows, and á

á

as inflows.
 p

ã The capital account records all
transactions between a domestic and
foreign resident that involves a change of
ownership of an asset.
ã It is the net result of public and private
international investment flowing in and
out of a country.
ã This includes foreign direct investment,
portfolio investment (such as changes in
holdings of stocks and bonds) and other
investments (such as changes in holdings
in loans, bank accounts, and currencies).

p

 p
ã From a domestic point of view, a foreign investor
acquiring a domestic asset is considered a capital
inflow, while a domestic resident acquiring a
foreign asset is considered a capital outflow.

ã Along with transactions pertaining to non-financial

and non-produced assets, the capital account
may also include debt forgiveness, the transfer of
goods and financial assets by migrants leaving or
entering a country, the transfer of ownership on
fixed assets, the transfer of funds received to the
sale or acquisition of fixed assets, gift and
inheritance taxes, death levies, patents,
copyrights, royalties, and uninsured damage to
fixed assets.
 p

  

ã Countries can impose capital controls to

control the flows into and out of their
capital accounts.
ã Countries without capital controls are said
to have full Capital Account Convertibility.
ã In layman's terms, it is basically a policy
that allows the easy exchange of local
currency (cash) for foreign currency at
low rates.
Ô
 
ã All types of liquid capital assets must be able to
be exchanged freely, between any two nations,
with standardized exchange rates.
ã The amounts must be a significant amount (in
excess of $500,000).
ã Capital inflows should be invested in semi-liquid
assets, to prevent churning and excessive
outflow.
ã Institutional investors should not use CAC to
manipulate fiscal policy or exchange rates.
ã Excessive inflows and outflows should be buffered
by national banks to provide collateral.
à 


ã The  
   consists of

asset inflows and outflows, such as
international purchases of stocks,
bonds and real estate.
  


ã Official reserves assets include gold,

foreign currencies, SDRs, reserve
positions in the IMF

 p
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ã The basic technique is standard,

double-entry accounting.

ã It classifies & records transactions

as- Debit/Credit



ã A debit records a transaction

increasing assets or reducing
liabilities.
ã A debit results from some kind of
transaction requiring an immediate
out-payment.
ã A debit arises from the purchase of
goods, claims, or reserve assets
and represents an inflow of value.

 

ã A credit records a transaction

reducing assets or increasing
liabilities.
ã It results from some kind of
transaction requiring an immediate
in-payment.
ã A credit arises from the sale of
goods, claims, or reserve assets and
represents an outflow of value.
m |

ã A þ
  
þ   is defined as
a condition where the sum of debits and credits from
the current account and the capital and financial
accounts equal to zero; in other words, equilibrium
is where-



ã This is a condition where there are no changes in

Official Reserves.When there is no change in Official
Reserves, the balance of payments may also be
stated as follows
 Sp 
ã A  
 is when the sum of the current
account plus the private capital account is
counterbalanced by an accumulation of
official net assets, so official reserve
assets increase.

ã If it is in
 , the sum is
counterbalanced by an accumulation of
official net liabilities, so the country sees
its official reserve assets decline.
×
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 !
 ]"|

V
 

V

  
1 Exports $1,418.64 In 2000, the
2 Imports ($1,809.18) U.S. imported
3 Unilateral Transfers
|



V

  
$10.24 ($64.39) more than it
)
V 

   exported, thus
4 Direct Investment $287.68 ($152.44) running a
5 Portfolio Investment $474.39 ($124.94)
6 Other Investments $262.64 ($303.27) current account
|



V 

   $444.26 deficit of
7 Statistical Discrepancies 0.73




|

$0.30 $444.69 billion.






   ($0.30)
 ]"|

V
 

V

   During the same
1 Exports $1,418.64 year, the U.S.
2 Imports ($1,809.18) attracted net
3 Unilateral Transfers
|



V

  
$10.24 ($64.39) investment of
($444.69)
V 

   $444.26
4 Direct Investment $287.68 ($152.44) billion²clearly
5 Portfolio Investment $474.39 ($124.94)
6 Other Investments $262.64 ($303.27) the rest of the
|



V 

    world found the
7 Statistical Discrepancies 0.73




|

$0.30
U.S. to be a






   ($0.30) good place to
invest.
 ]"|


V
 

V

  
1 Exports $1,418.64
Under a pure
2 Imports ($1,809.18)
flexible
3 Unilateral Transfers $10.24 ($64.39) exchange rate
|



V

    regime, these
V 

  
4 Direct Investment $287.68 ($152.44) numbers would
5 Portfolio Investment $474.39 ($124.94) balance each
6 Other Investments $262.64 ($303.27)
|



V 

   
other out.
7 Statistical Discrepancies 0.73




|

$0.30






   ($0.30)
 ]"|


V
 

V

   But, In the
1 Exports $1,418.64 real world,
2 Imports ($1,809.18) there is a
3 Unilateral Transfers
|



V

  
$10.24 ($64.39) statistical
($444.69)
V 

   discrepancy.
4 Direct Investment $287.68 ($152.44)
5 Portfolio Investment $474.39 ($124.94)
6 Other Investments $262.64 ($303.27)
|



V 

   $444.26
7 Statistical Discrepancies 




|

$0.30






   ($0.30)
|
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where
BCA = balance on current account
BKA = balance on capital account
BRA = balance on the reserves account

The basic principle behind the identity is that a country

can only consume more than it can produce (a current
account deficit) if it is supplied capital from abroad (a
capital account surplus).

Under a pure flexible exchange rate regime,

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ã Since 1982 the U.S. has

experienced continuous deficits on
the current account and continuous
surpluses on the capital account.
ã During the same period, Japan has
experienced the opposite.

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à"|
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ã 1.China: 371.83
ã 2.Germany: 252.5
ã 3.Japan:210.97
ã 10.Singapore: 39.18
ã 47.Brazil: 1.71
ã 100.Barbados: (-0.24)
ã 169.India: (-15.49)
ã 181.USA: (-731.21)

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