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BALANCE OF PAYMENT

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Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Balance of Payments Accounts  

The BOP of a country is a systematic accounting record of all economic transactions during a given time period between the residents of a country and rest of the world. They are composed of the following: 
  
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The Current Account The Capital Account The Official Reserves Account Statistical Discrepancy
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

. All rights reserved. Inc. then a country is running a trade deficit.The Current Account     Includes all imports and exports of goods and services. then a country is running a trade surplus. If the debits exceed the credits. If the credits exceed the debits. Includes unilateral transfers of foreign aid. 3-2 Copyright © 2003 by The McGraw-Hill Companies.

. Govt. All rights reserved. Private) c) Income (Investment Income. Misc.Structure of Current Account I Merchandise II Invisibles (a + b + c) a) Services (Travel. Compensation to Employees) 3-3 Copyright © 2003 by The McGraw-Hill Companies. Inc. Insurance. Transportation. Not classified elsewhere.) b) Transfers (Official.

Inc.  3-4 Copyright © 2003 by The McGraw-Hill Companies. Banking Capital and other investments.The Capital Account  The capital account measures the difference between sales of assets to foreigners and purchases of foreign assets. portfolio investments . . The capital account is composed of Foreign Direct Investment (FDI). Loans. All rights reserved.

All rights reserved. .Statistical Discrepancy  There¶s going to be some omissions and misrecorded transactions²so we use a ³plug´ figure to get things to balance. 3-5 Copyright © 2003 by The McGraw-Hill Companies. Inc.

SDRs. . reserve positions in the IMF. Inc. 3-6 Copyright © 2003 by The McGraw-Hill Companies.The Official Reserves Account  Official reserves assets include gold. All rights reserved. foreign currencies.

The Balance of Payments Identity BCA + BKA + BRA = 0 where BCA = balance on current account BKA = balance on capital account BRA = balance on the reserves account Under a pure flexible exchange rate regime. Inc. All rights reserved. BCA + BKA = 0 3-7 Copyright © 2003 by The McGraw-Hill Companies. .

64 ($1.U.44) ($124.24 $1.30 ($0.39) ($444.64 $444.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account $287.39 $262. Inc.94) ($303. All rights reserved.418. 3-8 .809.68 $474.26 0. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.S.69) ($152.30) Copyright © 2003 by The McGraw-Hill Companies.18) ($64.73 $0.

39) ($444.94) ($303.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account $287. ($0.18) ($64. 3-9 .68 $474.24 $1. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10. the U.S.U.418.30 In 2000.S.69 billion. thus running a current account deficit of $444.44) ($124. Inc.73 $0.809.69) ($152.64 ($1. All rights reserved. imported more than it exported.39 $262.64 $444.30) Copyright © 2003 by The McGraw-Hill Companies.26 0.

U.30 ($0.24 $1. attracted net investment of $444. to be a good place to invest.26 billion²clearly the rest of the world found the U.64 $444.39 $262.18) ($64.S.39) ($444.68 $474. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.26 0.64 ($1. . the U. All rights reserved.418.S. Inc.73 $0.44) ($124.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account $287.809. 3-10 Copyright © 2003 by The McGraw-Hill Companies.S.69) ($152.30) During the same year.94) ($303.

68 $474.64 ($1. All rights reserved. 3-11 .24 $1.94) ($303.30 Under a pure flexible exchange rate regime.73 $0.64 $444.26 0. ($0.39 $262.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account $287.U.30) Copyright © 2003 by The McGraw-Hill Companies.18) ($64.809.39) ($444. Inc. these numbers would balance each other out.69) ($152.S. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.44) ($124.418.

69) ($152. Inc.30 ($0.44) ($124. Statistical Discrepancies Overall Balance Official Reserve Account $287.94) ($303. All rights reserved.39) ($444. there is a statistical discrepancy.39 $262.809.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account In the real world.64 ($1.418.30) Copyright © 2003 by The McGraw-Hill Companies.64 $444.S.26 0. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.U.73 $0.68 $474.24 $1. 3-12 .18) ($64.

30= ±($0.809. All rights reserved.94) ($303.24 $1.64 $444.418.64 ($1.30) ($444.44) ($124. Inc. Balance of Payments Data Credits Current Account 1 2 3 Exports Imports $10.73 = $0. .69) ($152.18) ($64.30 ($0.26 0. the balance of payments identity should hold: BCA + BKA = ± BRA Statistical Discrepancies Overall Balance Official Reserve Account $287.U.30) 3-13 Copyright © 2003 by The McGraw-Hill Companies.S.39 $262.26 + $0.39) ($444.68 $474.27) Debits Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Including that.69) + $444.73 $0.

39 $262.94) ($303.24 $1.39) ($444.73 $0.18) ($64.30 D Q ($0.26 0.69) ($152. Inc.418.64 $444.64 ($1.68 $474.30) Copyright © 2003 by The McGraw-Hill Companies.809. 3-14 .44) ($124. All rights reserved.27) Debits Exchange rate $ P S Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account $287.Balance of Payments and the Exchange Rate Credits Current Account 1 2 3 Exports Imports $10.

64 ($1.418.18) ($64.Balance of Payments and the Exchange Rate Credits Current Account 1 2 3 Exports Imports $10. Inc.94) ($303.64 $444.73 $0. 3-15 .S. they are supply dollars to the FOREX market.69) ($152.24 $1.809.30) Copyright © 2003 by The McGraw-Hill Companies.26 0.39) ($444.27) Debits Exchange rate $ P S Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account $287.44) ($124.39 $262.30 D Q ($0.68 $474. All rights reserved. citizens import. As U.

39 $262.27) Debits Exchange rate $ P S Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account $287.24 $1.30) Copyright © 2003 by The McGraw-Hill Companies.44) ($124.809. citizens export.64 $444.73 $0. Inc.30 D Q ($0.Balance of Payments and the Exchange Rate Credits Current Account 1 2 3 Exports Imports $10. others demand dollars at the FOREX market.94) ($303.18) ($64. As U. All rights reserved.S.68 $474.418.26 0.69) ($152.64 ($1. 3-16 .39) ($444.

44) ($124.809.26 0.24 $1. the supply of dollars increases.418.27) Debits Exchange rate $ P S S1 Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account Statistical Discrepancies Overall Balance Official Reserve Account $287.39 $262. All rights reserved.64 ($1. As the U. Inc. government sells dollars.68 $474.64 $444.Balance of Payments and the Exchange Rate Credits Current Account 1 2 3 Exports Imports $10.94) ($303.39) ($444.30 D Q ($0.S. 3-17 .73 $0.30) Copyright © 2003 by The McGraw-Hill Companies.69) ($152.18) ($64.

Inc. Japan has experienced the opposite.Balance of Payments Trends   Since 1982 the U. . All rights reserved. 3-18 Copyright © 2003 by The McGraw-Hill Companies.S. has experienced continuous deficits on the current account and continuous surpluses on the capital account. During the same period.

All rights reserved.Balances on the Current (BCA) and Capital (BKA) Accounts of the United States 500 400 300 200 100 U. 3-19 U.S.S. 2000 Copyright © 2003 by The McGraw-Hill Companies. BKA . Inc. BCA 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -100 -200 -300 -400 -500 Source: IMF International Financial Statistics Yearbook.

Balances on the Current (BCA) and Capital (BKA) Accounts of United Kingdom 40 30 20 10 0 1982 -10 -20 -30 -40 -50 1984 1986 1988 1990 1992 1994 1996 1998 2000 UK BCA UK BKA Source: IMF International Financial Statistics Yearbook. 2000 Copyright © 2003 by The McGraw-Hill Companies. 3-20 . Inc. All rights reserved.

Inc. 2000 Copyright © 2003 by The McGraw-Hill Companies. All rights reserved.Balances on the Current (BCA) and Capital (BKA) Accounts of Japan 150 100 50 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -50 -100 -150 Source: IMF International Financial Statistics Yearbook. 3-21 Japan BCA Japan BKA .

Balances on the Current (BCA) and Capital (BKA) Accounts of Germany Germ Germ - yB A y BKA Source: IMF International Financial Statistics Yearbook. All rights reserved. 2000 Copyright © 2003 by The McGraw-Hill Companies. Inc. 3-22 .

All rights reserved.Balances on the Current (BCA) and Capital (BKA) Accounts of China 35 30 25 20 15 China BCA 10 China BKA 5 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -5 -10 -15 Source: IMF International Financial Statistics Yearbook. 3-23 . Inc. 2000 Copyright © 2003 by The McGraw-Hill Companies.

3-24 Copyright © 2003 by The McGraw-Hill Companies. .Balance of Payments Trends     Germany traditionally had current account surpluses. Inc. All rights reserved. This is largely due to German reunification and the resultant need to absorb more output domestically to rebuild the former East Germany. Since 1991 Germany has been experiencing current account deficits. What matters is the nature and causes of the disequilibrium.

All rights reserved.S. BCA U. 3-25 .S.Balances on the Current (BCA) and Capital (BKA) Accounts of Five Major Countries 500 400 300 200 100 0 1982 -100 -200 -300 -400 -500 1984 1986 1988 1990 1992 1994 1996 1998 2000 China BCA China BKA Japan BCA Japan BKA Germany BCA Germany BKA UK BCA UK BKA U. 2000 Copyright © 2003 by The McGraw-Hill Companies. Inc. BKA Source: IMF International Financial Statistics Yearbook.