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BALANCE OF PAYMENTS

BALANCE OF PAYMENTS
A countrys balance of payments accounts keep
track of both its payments to and its receipts from
foreigners.
Any transaction resulting in a payment to foreigners
is entered in the balance of payments accounts as
a debit and is given a negative () sign.
Any transaction resulting in a receipt from
foreigners is entered as a credit and is given a
positive (+) sign.
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Balance of Payments Accounting
The Balance of Payments is the statistical record of a
countrys international transactions over a certain period of
time presented in the form of double-entry bookkeeping.

N.B. when we say a countrys balance of
payments we are referring to the
transactions of its citizens and
government.
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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
Balance of Payments Accounts
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The Current Account
Includes all imports and exports of goods
and services.
Includes unilateral transfers of foreign aid.
If the debits exceed the credits, then a
country is running a trade deficit.
If the credits exceed the debits, then a
country is running a trade surplus.
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The Capital Account
The capital account measures the
difference between sales of assets to
foreigners and purchases of foreign
assets.

The capital account is composed of
Foreign Direct Investment (FDI), portfolio
investments and other investments.
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Official Reserves Acccount
Records level of official reserves
Four types of assets
Gold
Convertible currencies
SDRs
Reserve positions at the IMF

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Statistical Discrepancy
Theres going to be some omissions
and misrecorded transactionsso
we use a plug figure to get things
to balance.

BALANCE OF PAYMENTS:
CURRENT ACCOUNT
The balance of payments accounts divide exports
and imports into three categories:
Merchandise trade
Exports or imports of goods.
Services
Payments for legal assistance, tourists expenditures, and
shipping fees.
Income
International interest and dividend payments and the earnings
of domestically owned firms operating abroad.
It also includes unilateral current transfers (like gifts
and foreign aids).

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BALANCE-OF-PAYMENT
. Capital Account
a. Function: records public and
private investment and lending.
b. Inflows = credits
c. Outflows = debits
d. Transactions classified as
1.) portfolio
2.) direct
3.) short term

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BALANCE-OF-PAYMENT

Official Reserves Account
a. Function:
1.) measures changes in
international reserves
owned by central banks.
2.) reflects surplus/deficit of
a.) current account
b.) capital account
BALANCE OF PAYMENTS
Simple rule of double-entry book keeping:
Every international transaction automatically enters the
balance of payments twice, once as a credit and once
as a debit.

It holds true as every transaction has two sides:
If you buy something from foreigner, you must pay
him/her in someway.
BALANCE OF PAYMENTS:
STATISTICAL DISCREPANCY
Data associated with a given transaction
may come from different sources that differ
in coverage, accuracy, and timing.
This makes the balance of payments
accounts seldom balance in practice.
Account keepers force the two sides to
balance by adding to the accounts a
statistical discrepancy.


BALANCE OF PAYMENTS
Official Reserve Transactions
Central bank
The institution responsible for managing the supply of
money.
Official international reserves
Foreign assets held by central banks as a cushion against
national economic misfortune.
Official foreign exchange intervention
Central banks often buy or sell international reserves in
private asset markets to affect macroeconomic conditions
in their economies.

EXCHANGE RATES AND TRADE
When individuals, businesses and governments in
one country want to trade, borrow or lend in another
country, they must convert their currency into the
other country currency for the transaction.
Exchange rates are important because they enable
us to translate different counties prices into
comparable terms.
Exchange rates are determined in the same way as
other asset prices i.e. supply and demand.
EXCHANGE RATES
Two types of changes in exchange rates:
Depreciation of home countrys currency
A rise in the home currency prices of a foreign currency.
It makes home goods cheaper for foreigners and foreign
goods more expensive for domestic residents.
Appreciation of home countrys currency
A fall in the home price of a foreign currency.
It makes home goods more expensive for foreigners
and foreign goods cheaper for domestic residents.