Balance of Payments

Structure of BOP
 The Equation

Balance on the Current Account

=
Balance on the Capital and Financial
Account
 The Current Account
The Current Account is used to collect
together the value of:
Net goods
Net services
(Balance on goods and services)
Net Primary Income
Net Secondary Income (Current
Transfers)
 Net Goods

NET Goods = Exports of Goods - Imports of

Goods
 Net Services

Net Services = Exports of Services -

Imports of Services
 Net Primary Income
Net Primary Income = Income Credits -
Income Debits
Debits Credits
Interest paid to foreign firms. Interest received from foreign
Profits of foreign firms in firms.
Australia; Profits of Australian firms
Dividends earned offshore;
Undistributed profits Dividends
Payments to offshore Undistributed profits
employees Payments to offshore
employees
 Net Secondary Income
Net Secondary Income = Secondary
Income Credits - Secondary Income
Debits

Secondary Income (current transfers) or non-commercial

payments which could be thought as gifts in the form of:
 Worker remittances to overseas people or to
Australian
 Foreign aid (non-conditional (tied) aid)
 Gifts to charities

Until September 2009 this was known as Current Transfers

 The Capital Account
 Capital Transfers
Capital Transfers is made up of two
parts.
s Capital Transfers in the form of
“Conditional” or “Tied” foreign aid.
Purchase and sale of non-produced,
non-financial assets.
 Financial Account
The Financial Account is made up of:

Direct Investment
Portfolio Investment
Financial Derivatives
Other Investments
Reserve Assets
 Direct Investment
Which includes equity funds (gaining
ownership rights) or debts funds
(loans). Direct investment can be made
by both Australians buying assets
abroad or lending to firms offshore
which they control or by foreigners
buying assets in Australia or lending to
firms in Australia which they control.
 Portfolio Investment
Commercial deals involving savings
movements across national borders
into assets which do not give the
provider of the savings significant
control of the user of these savings,
e.g.
Equity securities (Shares)
Debt securities (T-Bonds, T-Notes,
Debentures)
 Financial Derivatives
Financial derivatives such as interest
rate swaps, futures and options.
 Other Investments
Commercial deals involving savings that
are not based on securities or do not
give significant control or involve
affiliated companies, The main types
of other investments are:
e Trade Credit
e Loans made to intermediaries
t Currency and deposits
 Reserve Assets
Reserve assets are offshore holdings of
mainly foreign currencies that the
RBA may have either on deposit with
overseas ADIs. These may include
h Gold holdings
h Special drawing rights
r The reserve position at the IMF
 Calculating the Balance on Capital and Financial
Account

Capital Transfer credits - Capital transfer debits =

Balance on Capital Account

Net Direct Investment inflow + Net Portfolio Investment

inflow + Net Other Investment Inflow + Net Change in
Reserve Assets = Net Financial Inflow or Financial
Balance

Balance on Capital Account + Financial Account Balance

= Balance on Capital and Financial Account