Lecture Notes 6

Balance of Payments (BoP)

Prof. Metin Ercan

Balance of Payments (BoP)
• Balance of Payments (BoP) is about
international transactions of a country including
inflows and outflows of goods and services and
monetary assets between residents and non-
residents
• The BoP accounts are based on a system of
book keeping that records all payments that
have a direct bearing on the movements of
funds between a nation (both private and public)
and foreign countries

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Principles of BoP Accounting
1) All transactions that provide Turkey with additional supply of foreign
money should be recorded with a plus (+) sign to reflect that they are
credits:
• Foreign money IN (our receipts)
• Turks are provided with additional supply of foreign money
As a result of:
• Exports of goods (e.g. textile products)
• Payments from foreign tourists
• Investments by foreigners in Turkey
– through lending by foreigners (we borrow)
– physical assets
• Unilateral payments (e.g. workers’ remittances, foreign aid)

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Principles of BoP Accounting
2) All transactions that provide foreigners with additional
supply of foreign money from Turkish residents should
be recorded with a negative (-) sign to reflect that they
are debits
Foreign money OUT (our payments) → (-)
→ Debits
As a result of
• Imports of goods
• Payments by Turkish tourists abroad
• Investment by Turkish residents at foreign countries
– E.g. money deposited in Swiss banks
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BoP Accounts
• International transactions are summed into 2 major categories
• The BoP accounts are broken down into:
– Current Account (Cari İşlemler hesabı)
– Capital and Financial Accounts (Sermaye ve Finans Hesapları)
• Total change in Reserves
Merchandise exports Net exports of goods → Component of GNI and directly
Merchandise Imports
Net Services
} and services contributes to production and
employment

• Any surplus or deficit in the current account must be balanced either

– by capital and financial account transaction (lending or borrowing
abroad)
– or by change in government reserve asset items and/or net errors
& omissionsa
Conceptual Current + Capital + Financial + Net errors = Change in
relationship in the account account account & omissions government
BoP accounts reserve assets
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Current Account Balance
• Economists closely follow the Current Account Balance
(CAB) because they believe it can provide information
on the future movements of exchange rates
• The CAB provides some indication of what happens to
import and export demand which can affect the
exchange rates
• If Turks develop an appetite for foreign goods, the
increased demand for foreign goods (imports) tends to
depreciate TL or appreciate other currencies because
foreign goods will continue to sell well even with a
higher value of F/X

6
Current Account Deficit
• ‘Current Account Deficit’ (CAD) can be defined
as the total of:

Private sector balance + Fiscal balance (public sector balance)

(Private savings – private investment) (gov. spending – gov. revenue)

assuming that private sector balance is constant

or it cannot offset public sector imbalance
• Fiscal deficit can lead to CAD. This is called
‘twin deficit’ ð Both fiscal deficit and current
account deficit occur at the same time

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Current Account Deficit (CAD)

• If CAD occurs, savings of other countries should

be obtained

• In other words, CAD reflects the magnitude of

‘IMPORTED’ savings