MODULE 1 – CHAPTER 3: THE

BALANCE OF PAYMENTS
LEARNING OUTCOMES
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• Learn how government and multinational enterprise management uses balance of payments
accounts and accounting in decision-making
• Examine how the primary accounts of the balance of payments reflects fundamental economic
and financial activities across borders
• Explore how changes in the balance of payments affect key macroeconomic rates like exchange
rates and interest rates
• Analyze how exchange rate changes affect the prices and competitiveness of international trade

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 The measurement of
all international
economic transactions
BALANCE OF PAYMENTS (BOP) that take place
between the
residents of a country
and foreign residents

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FUNDAMENTALS OF BOP ACCOUNTING
Is a statement of cash flows over an interval of time more
BOP Statement in accord with a corporate income statement, but on a
cash basis.

Is an event, such as the export of a goods or services, that records

BOP Debit foreign exchange earned – an inflow of foreign exchange to the country.

Records foreign exchange spent, such as payments for imports or purchases of services –
BOP Credit an outflow of foreign exchange.

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BALANCE OF PAYMENTS
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• The BOP has three major sub-accounts – the Current account, the Capital account and the
Financial account. Additionally, official reserves account and net errors and omissions account to
get the zero sum.

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BALANCE OF PAYMENTS
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THREE MAIN ELEMENTS OF ACTUAL PROCESS OF MEASURING
INTERNATIONAL TRANSACTIONS ACTIVITY
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• Identifying what is and is not an international economic transaction;

• Understanding how the flow of goods, services, assets, and money creates debits and credits to
the overall BOP; and
• Understanding the bookkeeping procedures for BOP accounting

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 Includes all
international economic
transactions with
income or payment
THE CURRENT ACCOUNT
flows occurring within
the year, the current
period.

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FOUR SUBCATEGORIES OF CURRENT ACCOUNT

Goods Trade It is the export and import of goods.

Services Trade The export and import of services.

Income It is associated with investments made in previous periods.

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FOUR SUBCATEGORIES OF CURRENT ACCOUNT
It is a financial settlement associated with the change in
Current transfers ownership of real resources or financial items.

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CURRENT ACCOUNT
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CURRENT ACCOUNT
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 Is made up of
transfers of financial
assets and the
THE CAPITAL AND FINANCIAL acquisition and
ACCOUNT disposal of
nonproduced/nonfina
ncial assets.

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CAPITAL ACCOUNT
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FINANCIAL ACCOUNT – FOUR COMPONENTS
is defined as investment that has a long-term life or
Direct Investment maturity and in which the investor exerts some explicit
degree of control over the assets.

Is defined as both short-term in maturity and as an investment in which

Portfolio Investment the investor has no control over the assets.

is an instrument whose value is derived from the value of one or more underlying, which
Net financial derivatives can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most
common examples of derivative instruments are Forwards, Futures, Options and Swaps.

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FOUR SUBCATEGORIES OF CURRENT ACCOUNT
This final component of the financial account consists of
various short-term and long-term trade credits, cross-
Other Asset Investment border loans from all types of financial institutions,
currency deposits and bank deposits, and other accounts
receivable and payable related to cross-border trade.

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 Is the total reserves
held by official
monetary authorities
OFFICIAL RESERVES ACCOUNT within a country.

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OFFICIAL RESERVES ACCOUNT
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 Current and financial
account entries are
collected and recorded
separately, errors or
NET ERRORS AND OMISSIONS statistical discrepancies
will occur. The net errors
ACCOUNT and omissions of account
ensures that the BOP
actually balances.

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BOP STRUCTURE
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EXERCISE PROBLEMS
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BOP IMPACTS ON KEY MACROECONOMICS RATES
The government bears the responsibility to ensure that the
Fixed Exchange Rate Countries BOP is near zero.

The government of a country has no responsibility to peg its foreign

Floating Exchange Rate Countries exchange rate.

They often seek to alter the market’s valuation of their currency by influencing the
Managed Floats motivations of market activity, rather than through direct intervention in the foreign
exchange markets.

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 “INVESTMENT IN
KNOWLEDGE PAYS THE
BEST INTEREST.”
- BENJAMIN FRANKLIN
Thank you, Stay Safe and God Bless! ☺