LITERATURE

 Krughman P.R., Obstfeld M., International Economics. Theory and

Policy. Pearson Education Ltd.
 Copeland L., Exchange Rates and International Finance. Pearson
Education Ltd.
 Pilbeam K., International Finance, Palgrave Macmillan
 Pugel T.A., Lindert P.H., International Economics, McGraw-Hill
 Clark E., International Finance, Cengage Learning EMEA
 Aliber R.Z., International Finance, Edward Elgar Pub
 Gibson H.D., International Finance: Exchange Rates and Financial
Flows in the International Financial System, Longman
BALANCE OF
PAYMENTS
PIOTR PIETRASZEWSKI
DEFINITION

BALANCE OF PAYMENTS (BOP) – a statistical statement that records

all international economic transactions between the residents of a
country and foreign residents during a certain period of time
DEFINITION

BALANCE OF PAYMENTS (BOP) – a statistical statement that records

all international economic transactions between the residents of a
country and foreign residents during a certain period of time

Every transaction results in:

 payments to foreigners (and then is entered into the BOP on a debit
side and is given a negative (-) sign)
 receipts from foreigners (and then is entered into the BOP on a
credit side and is given a positive (+) sign)

BEBIT = OUTFLOW (-)

CREDIT = INFLOW (+)
STRUCTURE

A. CURRENT ACCOUNT (CuA)

B. CAPITAL ACCOUNT (CaA)
C. FINANCIAL ACCOUNT (FA)
D. NET ERRORS AND OMISSIONS (NEO) – records the statistical
discrepancies that arise in gathering BOP data
A. CURRENT ACCOUNT

 transactions that arise from the export (+) or import (-) of goods
and services (Balance of Trade)
A. CURRENT ACCOUNT

 transactions that arise from the export (+) or import (-) of goods
and services (Balance of Trade)
 net flow of property income, which arises when residens of one
country own income-earning assets in another country (income
from direct and portfolio investments: profits, interest, dividends)
or work abroad (employee compensation)
A. CURRENT ACCOUNT

 transactions that arise from the export (+) or import (-) of goods
and services (Balance of Trade)
 net flow of property income, which arises when residens of one
country own income-earning assets in another country (income
from direct and portfolio investments: profits, interest, dividends)
or work abroad (employee compensation)
 current transfers – unilateral transfer payments between countries
(payments that don’t correspond to the purchase of any good,
service, or asset): foreign aid, the budget contribution to the EU,
workers’ remittances, claims on non-life insurance, etc.
B. CAPITAL ACCOUNT

 capital transfers: the transfer of ownership of a fixed asset (e.g.,

when immigrant brings titles to a sum of money in foreign assets)
or the forgivenes of a liability by a creditor (e.g., when the
government of one country forgives a sum of money in debt owed
to it by the goverment of other country)
B. CAPITAL ACCOUNT

 capital transfers: the transfer of ownership of a fixed asset (e.g.,

when immigrant brings titles to a sum of money in foreign assets)
or the forgivenes of a liability by a creditor (e.g., when the
government of one country forgives a sum of money in debt owed
to it by the goverment of other country)
 acquisition or disposal of non-produced, nonfinancial assets,
tangible (e.g., land) or intagible (patents, copyrights, trademarks,
franchises etc.)
C. FINANCIAL ACCOUNT

It records all international purchases or sales of financial assets:

 foreign direct investments (e.g., buying or selling factories)

 foreign portfolio investments (e.g. buying or selling shares, bonds,
deposits)

purchases of foreign financial assets = financial outflows (-)

sales of financial assets to foreigners = financial inflows (+)
C. FINANCIAL ACCOUNT

It records all international purchases or sales of financial assets:

 foreign direct investments (e.g., buying or selling factories)

 foreign portfolio investments (e.g. buying or selling shares, bonds,
deposits)

purchases of foreign financial assets = financial outflows (-)

sales of financial assets to foreigners = financial inflows (+)

 official reserve transactions (official financing): changes in official

reserve assets (official international reserves, foreign exchange
reserves)
OFFICIAL RESERVE TRANSACTIONS

official reserve assets – foreign assets (currency) held by the

domestic central bank

When a central bank purchases or sells a foreign asset, the

transaction appeares in its country’s financial account just as if
the same transaction has been carried out by a private citizen.

purchases of (increase in) foreign assets - debits (-)

sales of (decrease in) foreign assets - credits (+)
THE PRINCIPLE OF BOP ACCOUNTING

THE PRINCIPLE OF DOUBLE-ENTRY BOOKKEEPING:

every international transaction automaticly enters the BOP twice,
once as a credit and once as a debit
THE PRINCIPLE OF BOP ACCOUNTING

THE PRINCIPLE OF DOUBLE-ENTRY BOOKKEEPING:

every international transaction automaticly enters the BOP twice,
once as a credit and once as a debit

all figures in the BOP accounts should sum up to zero

(the BOP statement must balance)

CuA balance + CaA balance + FA balance + NEO = 0

EXAMPLES OF PAIRED TRANSACTIONS (1)

A man from the USA buys a computer from the Italian company
and pays with a $1000 check. His payment for a good bought
from a foreign resident enters the U.S current account as debit
(and the Italian current account as credit).
EXAMPLES OF PAIRED TRANSACTIONS (1)

A man from the USA buys a computer from the Italian company
and pays with a $1000 check. His payment for a good bought
from a foreign resident enters the U.S current account as debit
(and the Italian current account as credit).
Italian company’s U.S. salesperson deposits the check in
company’s account at Citibank in New York. In this case the
company purchased a U.S. asset worth $1000 – a bank deposit –
and the transaction shows up as a credit in the U.S financial
account (and as a debit in the Italian financial account).
EXAMPLES OF PAIRED TRANSACTIONS (2)

An American buys a newly issued share of stock in the U.K oil

company British Petroleum, paying $100 with a check drawn on
his stockbroker money market account. This purchase will be
shown as a debit in the U.S. financial account (and as a credit in
the British financial account).
EXAMPLES OF PAIRED TRANSACTIONS (2)

An American buys a newly issued share of stock in the U.K oil

company British Petroleum, paying $100 with a check drawn on
his stockbroker money market account. This purchase will be
shown as a debit in the U.S. financial account (and as a credit in
the British financial account).
BP deposits $100 in its own U.S. bank account at Second Bank of
Chicago. As a purchase of U.S bank deposit it will enter the U.S
financial account as a credit (and the British financial account as a
debit).
MODIFICATION OF THE EXAMPLE (2)

Let’s assume, that BP doesn’t want to invest in dollar assets but

instead it changes dollars into British pounds in his bank in Great
Britain. And the bank does the same in the Bank of England.
MODIFICATION OF THE EXAMPLE (2)

Let’s assume, that BP doesn’t want to invest in dollar assets but

instead it changes dollars into British pounds in his bank in Great
Britain. And the bank does the same in the Bank of England.
The Bank of England buys the U.S. Federal Bonds worth $100. As
a purchase of U.S assets it will enter the U.S financial account as
a credit (and the British financial account as a debit).
EXAMPLES OF PAIRED TRANSACTIONS (3)

The U.S. banks forgive $10000 in debt owed to them by the

government of some foreign country. As a capital transfer, it
appeares as a $10000 debit in the U.S. capital account (and as a
credit in this foreign country’s capital account).
EXAMPLES OF PAIRED TRANSACTIONS (3)

The U.S. banks forgive $10000 in debt owed to them by the

government of some foreign country. As a capital transfer, it
appeares as a $10000 debit in the U.S. capital account (and as a
credit in this foreign country’s capital account).
Because it reduced the U.S. financial assets held abroad, it will be
treated as the U.S. asset export and entry the U.S. financial
accout as a credit (and this foreign country’s financial account as
a debit).
EXERCISE 1
 Determine which part of the Balance of Payments (Current Account,
Financial Account or Capital Account) do listed transactions enter:
 buying shares in foreign corporations
.…………………….
 selling foreign bonds
.…………………….
 foreign donations
……………………..
 forgiveness of a liability by a foreign creditor
……………………..
 a flow of interest from debt assets denominated in foreign currencies
……………………..
 disposal of copyrights to foreign purchases
.…………………….
 selling a factory that is localized abroad
……………………..
 buying land abroad
……………………..
EXERCISE 2
 An American company buys a good produced by a Polish
company paying $100 with a check. This company deposits
a check in its Polish bank, and the bank do the same in its
American counterpart. Show, please, how these
transactions enter the Polish Balance of Payments (on
which accounts and with what signs will they be shown?).
EXERCISE 3
 An English bank buys a bond issued by a Polish company
paying £300 with a check. This company deposits a check
in its own Polish bank, and the bank do the same in its
English counterpart. Show how these transactions enter the
Polish Balance of Payments (on which accounts and with
what signs will they be shown?).
WHAT DOES THE BOP EQUILIBRIUM AND
DISEQUILIBRIUM MEAN?
 Let’s divide FA in two parts:

FA = nonreserve transactions + official reserve transactions

 Then the principle of the BOP accounting can be written as follows:

CuA bal. + CaA bal. + nonreserve FA bal. +

+ official reserve bal. + NEO = 0 (*)
WHAT DOES THE BOP EQUILIBRIUM AND
DISEQUILIBRIUM MEAN?

 Let’s divide FA in two parts:

FA = nonreserve transactions + official reserve transactions

 Then the principle of the BOP accounting can be written as follows:

CuA bal. + CaA bal. + nonreserve FA bal. +

+ official reserve bal. + NEO = 0 (*)

 Let’s define now the OFFICIAL SETTLEMENTS BALANCE as the sum

of the CuA balance, CaA balance, the nonreserve portion of the FA
balance and NEO:

OSB = CuA bal. + CaA bal. + nonreserve FA bal. + NEO (**)

The OSB is also called the BALANCE OF PAYMENTS!

WHAT DOES THE BOP EQUILIBRIUM AND
DISEQUILIBRIUM MEAN?
❑ Comparing (*) and (**), we receive:

OSB + official reserve balllance = 0 or

OSB = - official reserve balllance

It means that OSB is equal to the balance of official reserve

transactions (with the opposite sign).
WHAT DOES THE BOP EQUILIBRIUM AND
DISEQUILIBRIUM MEAN?
❑ Comparing (*) and (**), we receive:

OSB + official reserve balllance = 0 or

OSB = - official reserve balllance

It means that OSB is equal to the balance of official reserve

transactions (with the opposite sign).

 The official settlements balance is not always balanced!

OSB = 0 equilibrium
When OSB > 0 we say there is the surplus in the BOP
OSB < 0 deficit
WHAT DOES THE BOP EQUILIBRIUM AND
DISEQUILIBRIUM MEAN?

OSB = 0 =0
When OSB > 0 then official reserve balllance <0
OSB < 0 >0
WHAT DOES THE BOP EQUILIBRIUM AND
DISEQUILIBRIUM MEAN?

OSB = 0 =0
When OSB > 0 then official reserve balllance <0
OSB < 0 >0

OSB = 0 don’t
When then official reserve assets change
OSB > 0 increase
OSB < 0 decrease
CONCLUSSIONS

 The equilibrium of BOP means that CuA deficit (surplus) = CA and

nonreserve FA surplus (deficit)
Then the balance of official reserve transactions = 0 (there is no
change in the official reserve assets)
CONCLUSSIONS

 The equilibrium of BOP means that CuA deficit (surplus) = CA and

nonreserve FA surplus (deficit)
Then the balance of official reserve transactions = 0 (there is no
change in the official reserve assets)
❑ The deficit of BOP means that capital outflows > capital inflows
It is a result of excessive purchases of foreign goods, services and
assets.
It results in the decrease of the official reserve assets.
CONCLUSSIONS

 The equilibrium of BOP means that CuA deficit (surplus) = CA and

nonreserve FA surplus (deficit)
Then the balance of official reserve transactions = 0 (there is no
change in the official reserve assets)
❑ The deficit of BOP means that capital outflows > capital inflows
It is a result of excessive purchases of foreign goods, services and
assets.
It results in the decrease of the official reserve assets.
❑ The surplus of BOP means that capital outflows < capital inflows
It is a result of increasing sales of goods, services and assets.
It results in the incrrease of the official reserve assets.
 EXERCISE 4

Count the change of official reserve assets of some country during

some year providing that it’s:
- net export = - 20
- net flow of property income = 10
- current transfers = -5
- capital accout balance = 0
- foreign direct investments balance = 15
- foreign portfolio investments balance = 10
You can assume that net errors and ommissions equals 0.
Is there a surplus or deficit in it’s BOP?
 EXERCISE 5

Let’s assume there is no change in official reserve assets of some

country during some year (which means there is equilibrium in the
BOP of this country). Count foreign portfolio investments balance
providing that it’s:
- net export = - 30
- net flow of property income = 5
- current transfers = -5
- capital accout balance = 0
- foreign direct investments balance = 10
BIGGEST DEBTORS
Current Account Ballance (2017, billions USD)
0
United United Canada India Turkey Australia Argentina Algeria Mexico Indonesia Egypt France
-50 States Kingdom

-100

-150

-200

-250

-300

-350

-400

-450

-500

https://www.imf.org/external/datamapper/BCA@WEO/WEOWORLD
BIGGEST CREDITORS
Current Account Ballance (2013, billions USD)
350

300

250

200

150

100

50

https://www.imf.org/external/datamapper/BCA@WEO/WEOWORLD
BIGGEST CREDITORS AND BIGGEST DEBTOR
Current Account Ballance (2013, billions USD)
500
400
300
200
100
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-100
-200
-300
-400
-500
-600
-700
-800
-900

China, People's Republic of Germany Japan United States

https://www.imf.org/external/datamapper/BCA@WEO/WEOWORLD