The Balance of Payments

Chapter Objective:

INTERNATIONAL FINANCIAL MANAGEMENT

Chapter Three

3

This chapter serves to introduce the student to the balance of payments. How it is constructed and Third Edition how balance of payments data may be interpreted.
EUN / RESNICK

3-0

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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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. 3-2 Copyright © 2003 by The McGraw-Hill Companies. Inc.B. . All rights reserved. when we say “a country’s balance of payments” we are referring to the transactions of its citizens and government.

All rights reserved. Missouri. 3-3 .000 worth of bicycle frames from Mercian Bicycles in Darby England. Copyright © 2003 by The McGraw-Hill Companies.000 debit at Maplewood’s bank account. There will exist a $100. This will lead to a rise in the supply of dollars and the demand for British pounds.000 credit recorded by Mercian that offsets a $100. Inc.Balance of Payments Example    Suppose that Maplewood Bicycle in Maplewood. USA imports $100.

All rights reserved. Inc.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 The Official Reserves Account Statistical Discrepancy Copyright © 2003 by The McGraw-Hill Companies. 3-4 .

Inc. All rights reserved. If the credits exceed the debits. Includes unilateral transfers of foreign aid. then a country is running a trade deficit. If the debits exceed the credits. then a country is running a trade surplus. .The Current Account     Includes all imports and exports of goods and services. 3-5 Copyright © 2003 by The McGraw-Hill Companies.

S. The capital account is composed of Foreign Direct Investment (FDI).000.000 capital account surplus—absent of U. enjoys about a $444. The U.S.000. sales of assets to foreigners and U. . borrowing from foreigners. portfolio investments and other investments. purchases of foreign assets. Inc. 3-6 Copyright © 2003 by The McGraw-Hill Companies. this ―finances‖ our trade deficit.S.The Capital Account    The capital account measures the difference between U. All rights reserved.S.

. Inc.Statistical Discrepancy   There’s going to be some omissions and misrecorded transactions—so we use a ―plug‖ figure to get things to balance.73 billion in 2000. 3-7 Copyright © 2003 by The McGraw-Hill Companies.1 shows a discrepancy of $0. Exhibit 3. All rights reserved.

. reserve positions in the IMF. SDRs. 3-8 Copyright © 2003 by The McGraw-Hill Companies. All rights reserved. Inc. foreign currencies.The Official Reserves Account  Official reserves assets include gold.

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 3-9 Copyright © 2003 by The McGraw-Hill Companies. Inc. All rights reserved. .

418.S.68 $474.39) ($444.73 $0.30 ($0.24 $1.94) ($303.30) Copyright © 2003 by The McGraw-Hill Companies.64 $444. Inc.69) ($152.809.U.26 0.44) ($124.18) ($64. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.39 $262. All rights reserved.64 ($1.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account 3-10 $287. .

94) ($303. All rights reserved. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.30) Copyright © 2003 by The McGraw-Hill Companies.73 $0.26 0.30 In 2000.39 $262.418.44) ($124. thus running a current account deficit of $444.68 $474. Inc.809.S. the U.S.64 $444.24 $1.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account 3-11 $287.U.69) ($152.64 ($1.69 billion. imported more than it exported. ($0. .39) ($444.18) ($64.

the U.64 ($1.69) ($152.39) ($444. All rights reserved.30 ($0.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account 3-12 $287. attracted net investment of $444.418.26 billion—clearly the rest of the world found the U.39 $262.S.94) ($303.26 0. to be a good place to invest.30) During the same year.73 $0.68 $474.18) ($64.S. .S. Copyright © 2003 by The McGraw-Hill Companies. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.44) ($124.24 $1.64 $444. Inc.U.809.

27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account 3-13 $287.24 $1.809.30) Copyright © 2003 by The McGraw-Hill Companies.68 $474.73 $0.418.69) ($152. Inc. these numbers would balance each other out.18) ($64. ($0.44) ($124. .64 $444.39) ($444.64 ($1.26 0. All rights reserved. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.94) ($303.U.39 $262.30 Under a pure flexible exchange rate regime.S.

26 0.94) ($303. . Statistical Discrepancies Overall Balance Official Reserve Account 3-14 $287.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account In the real world.39 $262. there is a statistical discrepancy.809.30 ($0.68 $474.30) Copyright © 2003 by The McGraw-Hill Companies.S.418.18) ($64.44) ($124.69) ($152. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10. All rights reserved.24 $1.64 $444. Inc.39) ($444.64 ($1.73 $0.U.

26 0.39) ($444.69) + $444.U.S. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.73 = $0.39 $262.18) ($64.64 $444.69) ($152.73 $0.30= –($0.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Including that.68 $474.94) ($303.30) Copyright © 2003 by The McGraw-Hill Companies.809.64 ($1. Inc.24 $1.418.44) ($124.30 ($0. All rights reserved.30) ($444.26 + $0. . the balance of payments identity should hold: BCA + BKA = – BRA Statistical Discrepancies Overall Balance Official Reserve Account 3-15 $287.

Inc.44) ($124.68 $474.24 $1.64 $444.26 0.27) Debits Exchange rate $ P S Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account 3-16 $287.18) ($64.809.94) ($303. .64 ($1.69) ($152.30 D Q ($0.418.39 $262.30) Copyright © 2003 by The McGraw-Hill Companies. All rights reserved.73 $0.39) ($444.Balance of Payments and the Exchange Rate Credits Current Account 1 2 3 Exports Imports $10.

Inc.44) ($124.S.64 ($1. . All rights reserved.39 $262.30 D Q ($0.39) ($444.809.418. they are supply dollars to the FOREX market.64 $444. citizens import.26 0.18) ($64.Balance of Payments and the Exchange Rate Credits Current Account 1 2 3 Exports Imports $10.68 $474.30) Copyright © 2003 by The McGraw-Hill Companies.69) ($152.24 $1.27) Debits Exchange rate $ P S Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account 3-17 $287.94) ($303. As U.73 $0.

As U.64 ($1.S.Balance of Payments and the Exchange Rate Credits Current Account 1 2 3 Exports Imports $10.30) Copyright © 2003 by The McGraw-Hill Companies.64 $444. others demand dollars at the FOREX market.94) ($303.27) Debits Exchange rate $ P S Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account 3-18 $287. . citizens export.44) ($124.69) ($152.418. Inc.24 $1.18) ($64.39) ($444.30 D Q ($0.73 $0. All rights reserved.26 0.68 $474.809.39 $262.

64 $444.73 $0.69) ($152. the supply of dollars increases.809.24 $1.Balance of Payments and the Exchange Rate Credits Current Account 1 2 3 Exports Imports $10.64 ($1. .27) Debits Exchange rate $ P S S1 Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account 3-19 $287.26 0.39) ($444.94) ($303. Inc.39 $262. All rights reserved. government sells dollars. As the U.30) Copyright © 2003 by The McGraw-Hill Companies.44) ($124.68 $474.S.418.18) ($64.30 D Q ($0.

has experienced continuous deficits on the current account and continuous surpluses on the capital account. 3-20 Copyright © 2003 by The McGraw-Hill Companies. All rights reserved.Balance of Payments Trends   Since 1982 the U. During the same period. . Inc. Japan has experienced the opposite.S.

S.S. 2000 Copyright © 2003 by The McGraw-Hill Companies.Balances on the Current (BCA) and Capital (BKA) Accounts of the United States 500 400 300 200 100 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -100 -200 -300 -400 -500 Source: IMF International Financial Statistics Yearbook. 3-21 U. BKA . All rights reserved. Inc. BCA U.

Inc. 3-22 . All rights reserved. 2000 Copyright © 2003 by The McGraw-Hill Companies.Balances on the Current (BCA) and Capital (BKA) Accounts of United Kingdom 40 30 20 10 0 1982 -10 -20 -30 -40 -50 1984 1986 1988 1990 1992 1994 1996 1998 2000 UK BCA UK BKA Source: IMF International Financial Statistics Yearbook.

All rights reserved. 2000 Copyright © 2003 by The McGraw-Hill Companies. Inc. 3-23 Japan BCA Japan BKA .Balances on the Current (BCA) and Capital (BKA) Accounts of Japan 150 100 50 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -50 -100 -150 Source: IMF International Financial Statistics Yearbook.

All rights reserved. Inc. 3-24 Germany BCA Germany BKA .Balances on the Current (BCA) and Capital (BKA) Accounts of Germany 80 60 40 20 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -20 -40 -60 -80 Source: IMF International Financial Statistics Yearbook. 2000 Copyright © 2003 by The McGraw-Hill Companies.

Balances on the Current (BCA) and Capital (BKA) Accounts of China 35 30 25 20 15 10 5 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -5 -10 -15 Source: IMF International Financial Statistics Yearbook. Inc. 2000 Copyright © 2003 by The McGraw-Hill Companies. 3-25 China BCA China BKA . All rights reserved.

3-26 Copyright © 2003 by The McGraw-Hill Companies. What matters is the nature and causes of the disequilibrium. . Inc. All rights reserved. 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.Balance of Payments Trends     Germany traditionally had current account surpluses.

2000 Copyright © 2003 by The McGraw-Hill Companies. BKA Source: IMF International Financial Statistics Yearbook.S. 3-27 .S. All rights reserved. Inc. BCA U.Balances on the Current (BCA) and Capital (BKA) Accounts of Five Major Countries 500 400 300 200 100 0 1982 -100 -200 -300 -400 -500 1984 1986 1988 1990 1992 1994 1996 1998 2000 China BCA China BKA Japan BCA Japan BKA Germany BCA Germany BKA UK BCA UK BKA U.

End Chapter Three 3-28 Copyright © 2003 by The McGraw-Hill Companies. . Inc. All rights reserved.

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