Faculty of Business

International
Finance
IBF301 – FPT UNIVERSITY
CHAPTER 3
Balance of Payment
Content
1. Balance-of-Payments Accounting

2. Balance-of-Payments Accounts

3. The Balance-of-Payments Identity

4. Balance-of-Payments Trends in Major Countries

Introduction
The balance of payments, which is a statistical record of a country’s transactions
with the rest of the world, is worth studying for a few reasons.

(1) the balance of payments
provides detailed information
concerning the demand and
supply of a country’s
currency.
(2) a country’s balance-of-
payment data may signal its
potential as a business
partner for the rest of the
world.
(3) balance-of-payments data
can be used to evaluate the
performance of the country
in international economic
competition.
1. Balance-of-Payments
Accounting
IBF301 – CHAPTER 3
Balance-of-Payments Accounting
The balance of payments can be formally defined as the statistical record of a
country’s international transactions over a certain period of time presented in the form
of double-entry bookkeeping.

N.B. when we say “a country’s balance of payments” we are referring to the transactions of its
citizens and government.

Credit (+): any transaction that results in a receipt from foreigners.

Debit (-): any transaction that gives rise to a payment to foreigners.

Balance-of-Payments Accounting:
Examples
EXAMPLE 3.1

For example, suppose that Boeing Corporation exported a Boeing 747 aircraft to Japan Airlines for $50 million,
and that Japan Airlines pays from its dollar bank account kept with Chase Manhattan Bank in New York City.
(Japan thoái vốn ra khỏi Mỹ là 50$)

EXAMPLE 3.2

Suppose, for another example, that Boeing imports jet engines produced by Rolls-Royce for $30 million, and that
Boeing makes payment by transferring the funds to a New York bank account kept by Rolls-Royce.

EXAMPLE 3.3

Suppose that Thomson Corporation, a U.S. information services company, acquires Reuters, a British news
agency, for $750 million, and that Reuters deposits the money in Barclays Bank in London, which, in turn, uses
the sum to purchase U.S. treasury notes.
Balance-of-Payments Accounting:
Examples
The above examples can be summarized as follows:

Note:
Not only international trade, that is, exports and imports, but also cross-border investments are recorded in
the balance of payments.
2. Balance-of-Payments
Accounts
IBF301 – CHAPTER 3
Balance-of-Payments Accounts
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:

i. The Current Account (hàng hóa giá trị, hoặc là liên quan đến XNK)

ii. The Capital Account (khả năng mua bán tài chính vdu, đất đai 1. FDI nước ngoài sang nước mình mở cty và điều
hành, 2,Portfolio investment: vốn đầu tư gián tiêps từ nứic ngoài, mua vài cổ phiếu và làm cổ đông, thông qua điều
hành chứ ko mở nhf máy)

iii.The Financial Account (excluding official reserves) ( i +ii hiếm khi nào =0, tkhoan sai số thống kê)

iv. The Official Reserves Account (hdong mua bán tài sản trong và ngoài nước đc thực hiện bởi chính phủ)
(1) Current Account
The current account includes the export and import of goods and
services

 Includes unilateral transfers of foreign aid.

 If the debits exceed the credits, then a country is running a trade deficit. (<0)
 If the credits exceed the debits, then a country is running a trade surplus. (>0)
(1) Current Account
The current account is divided into four finer categories:
• represents exports and imports of tangible goods, such as oil, wheat, clothes,
Goods trade automobiles, computers, and so on.

• include payments and receipts for legal, consulting, and engineering services,
royalties for patents and intellectual properties, insurance premiums, shipping
Services fees, and tourist expenditures. These trades in services are sometimes called
invisible trade.

• consists largely of payments and receipts of interest, dividends, and other income
Primary income on foreign investments that were previously made.

Secondary • involve “unrequited” payments.

income
(2) Capital Account
The capital account balance includes capital transfers and acquisitions and
disposals of non-produced, nonfinancial assets between U.S. residents and
foreigners.

Component:
 Capital transfers, unlike current transfers (i.e., secondary income), involve change of
ownership, acquisition, or disposal of an asset and tend to be large and infrequent.
 Non-produced, nonfinancial assets include natural resources such as land, mineral rights, and
air space; marketing assets such as brand and domain names; and contracts, leases, and licenses.
(3) Financial Account
The financial account balance measures the difference between U.S. sales of assets to foreigners
and U.S. purchases of foreign assets.

Foreign Direct • Direct investment occurs when the investor acquires a measure of control of the
investment foreign business.

Portfolio • Mostly represents sales and purchases of foreign financial assets such as stocks
investment and bonds that do not involve a transfer of control.

• Includes transactions in currency, bank deposits, trade credits, and so forth.

Other investment These investments are quite sensitive to both changes in relative interest rates
between countries and the anticipated change in the exchange rate.
Statistical Discrepancy
There’s going to be some omissions and misrecorded transactions—so we use a “plug”
figure to get things to balance.
Exhibit 3.1 shows a discrepancy of -$40.5 billion in 2018.
When we compute the cumulative balance of payments including the current account,
capital account, and the statistical discrepancies, we obtain the so-called overall balance
or official settlement balance.
(4) Official Reserve Account
When a country must make a net payment to foreigners because of a balance-of-
payments deficit, the central bank of the country (the Federal Reserve System in the
United States) should either run down its official reserve assets.
Official reserve assets include gold, foreign exchanges, and SDRs, or borrow anew
from foreign central banks.
The official reserve account includes transactions undertaken by the authorities to
finance the overall balance and intervene in foreign exchange markets.
BoP Accounts - Example
3. The Balance-of-
Payments Identity
IBF301 – CHAPTER 3
The Balance-of-Payments Identity
The Balance-of-Payments Identity (BOPI)

BCA + BKA + BFA + BRA = 0 (3.1)

where
BCA = balance on current account
BKA = balance on capital account
BFA = balance on financial account
BRA = balance on the reserves account

Under a pure fixed exchange rate regime,

BCA + BKA + BFA = - BRA (mua bán tài sản) (3.2)
Under a pure flexible exchange rate regime,

BCA + BKA = - BFA (3.3)

4. Balance-of-Payments
Trends in Major
Countries
IBF301 – CHAPTER 3
Practice
IBF301 – CHAPTER 3
Summary
IBF301 – CHAPTER 3
Summary
1. The balance of payments can be defined as the statistical record of a country’s international
transactions over a certain period of time presented in the form of double-entry bookkeeping.

2. In the balance of payments, any transaction resulting in a receipt from foreigners is recorded as a
credit, with a positive sign, whereas any transaction resulting in a payment to foreigners is recorded as
a debit, with a minus sign.

3. A country’s international transactions can be grouped into three main categories: the current account,
the capital account, and the official reserve account. The current account includes exports and imports
of goods and services, whereas the capital account includes all purchases and sales of assets such as
stocks, bonds, bank accounts, real estate, and businesses. The official reserve account covers all
purchases and sales of international reserve assets, such as dollars, foreign exchanges, gold, and SDRs.
Summary
4. The current account is divided into four subcategories: merchandise trade, services, factor income,
and unilateral transfers. Merchandise trade represents exports and imports of tangible goods, whereas
trade in services includes payments and receipts for legal, engineering, consulting, and other
performed services and tourist expenditures. Factor income consists of payments and receipts of
interest, dividends, and other income on previously made foreign investments. Lastly, unilateral
transfer involves unrequited payments such as gifts, foreign aid, and reparations.

5. The capital account is divided into three subcategories: direct investment, portfolio investment, and
other investment. Direct investment involves acquisitions of controlling interests in foreign businesses.
Portfolio investment represents investments in foreign stocks and bonds that do not involve
acquisitions of control. Other investment includes bank deposits, currency investment, trade credit, and
the like.
Summary
6. When we compute the cumulative balance of payments including the current account, capital
account, and the statistical discrepancies, we obtain the overall balance or official settlement balance.
The overall balance is indicative of a country’s balance-of-payments gap that must be accommodated
by official reserve transactions. If a country must make a net payment to foreigners because of a
balance-of payments deficit, the country should either run down its official reserve assets, such as
gold, foreign exchanges, and SDRs, or borrow anew from foreigners.

7. A country can run a balance-of-payments surplus or deficit by increasing or decreasing its official
reserves. Under the fixed exchange rate regime, the combined balance on the current and capital
accounts will be equal in size, but opposite in sign, to the change in the official reserves. Under the
pure flexible exchange rate regime where the central bank does not maintain any official reserves, a
current account surplus or deficit must be matched by a capital account deficit or surplus.
Thank you for your attention!

END OF CHAPTER