The Balance of Payments

 The measurement of all international economic transactions

between the residents of a country and foreign residents is
called the balance of payments (BOP).

The Balance of Payments is the statistical record of a country’s

international transactions over a certain period of time
presented in the form of double-entry bookkeeping.

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 Balance of Payments
Accounts

 They are composed of the following:

 The Current Account
 The Capital Account
 The Official Reserve Account

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 Balance of Payments
Accounts

Current Account
 It includes all international economic transactions with income or payment
flows occurring within one year, the current period.
 It consists of the following four subcategories
 Merchandise trade – export and import of tangible goods

 Services – payments and receipts for legal and consulting fees,

royalties, tourist expenditures

 Investment income – payments and receipts of interest, dividends, and

other income on foreign investments

 Unilateral Transfers – “unrequited” payments (e.g. 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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 Balance of Payments
Accounts
The capital account
 Records sales to foreigners of Ethiopian financial assets and
Ethiopian purchases of foreign financial assets.
 records public and private investment and lending.
 It is composed:
 Foreign Direct investment involves acquisitions of controlling interests
in foreign businesses.
 Portfolio investment represents investment in foreign shares and bonds
that do not involve acquisitions of control.
 Other investment consists of various short-term and long-term trade
credits, cross-border loans, currency deposits, bank deposits and other
A/R and A/P related to cross-border trade
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 Balance of Payments
Accounts
The Reserve Account
 The Reserve Account of BOP records changes in the amount of
“official” reserve assets held by the Bank of Ethiopia.
 The Official Reserves Account is the total reserves held by
official monetary authorities within the country.
 These reserves are normally composed of the major currencies
used in international trade and financial transactions (hard
currencies): gold, foreign currencies, SDRs, reserve positions in
the IMF.
 If a country must make net payment to foreigners because of
BOP deficit, the country could either run down its official
reserve assets or borrow anew from foreigners.
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 Balance of Payments
Accounts

Statistical Discrepancy/Net Errors and Omissions

 There’s going to be some omissions and misrecorded
transactions—so we use a “plug” figure to get things to balance.
 Missing data such as illegal transfers
How to calculate?
 BP = 0 when all known transactions are accounted for, so the
SD is the "residual" value that will balance the books.