19 terms

The Balance of Payments

Balance of Payments
A record of all economic transactions between the residents of the country and the residents of all other countries within a given period of time (1 year). Its role is to show all payments received from other countries (credits) and all payments made to other countries (debits). In a year, all inflows of payments must be equal to outflows; sum of credits=sum of debits.
Demand/Supply of Currency and Balance of Payments
Credits represent foreign demand for national currency, corresponding to a foreign supply of all other currencies given up to buy that currency. Debits represent national supply of national currency, corresponding to national demand for foreign currencies.

In the balance of payments accounts of a country, all credits create a foreign demand for the country's currency; all debits create a supply of the domestic currency.
Current Account
The current account of the balance of payments is the sum of: 1.) the balance of trade in good 2.) the balance of trade in services 3.) income inflows minus outflows and 4). current transfer inflows minus outflows. The most important part of the current account in most countries is the balance of trade in goods and services.

If deficit, there is an excess supply of the currency is in FOREX. Supplied>Demand.
Balance of Trade in Goods
Exports of goods (credits) minus imports (debits). Exports increase demand for currency, decrease supply. Imports decrease demand for currency, increase supply.
Balance of Trade in Services
Same as Balance of Trade in Goods. Services include insurance, tourism, transportation and consulting. When foreigners visit, nation is exporting tourism services.
Income (in Current Account)
All inflows of wages, rent, interest and profits from abroad, minus all outflows of wages, rents, interest and profits. EX. Earning wages abroad and send them home, having bank accounts that earn interest, own stocks in another country that earn dividend income, or own a subsidiary of a MNC that earns profits.
Current Transfers
Current inflows due to transfers from abroad like gifts, foreign aid and pensions, minus outflows of such transfers to other countries.
The Capital Account
The Capital Account of the balance of payments is composed of inflows minus outflows of funds for capital transfers and transactions in non-produced, non-financed assets. Relatively small compared to the current & national account.
Capital Transfers
Inflows minus outflows for things such as debt forgiveness (when debt is cancelled), non-life insurance claims and investment grants (money given as a gift by governments to finance physical capital). (Component of Capital Account)
Non-Produced, Non-Marketable Assets
Inflows minus outflows of purhcase or use of natural resources that have not been produced (land, mineral rights, forestry rights, water, fishing rights, airspace and electromagnetic spectrum).
Financial Account
Consists of inflows minus outflows of funds for 1.) Direct investment, 2.) Portfolio Investment, and 3.) Reserve Assets
Direct Investment
Also, "Foreign Direct Investment." Includes investment in physical capital like buildings and factories, usually undertaken by MNCs.
Portfolio Investment
Financial investments (such as stocks and bonds). ??? P. 398
Reserve Assets
Or, official reserves. Foreign currency currency reserves that the central bank can buy or sell to influence the value of the country's currency. In selling foreign currency, they buy local currency. This is an inflow of currency, appearing as a credit in the financial account. (QUESTION: Buying Boples from whom?)
Errors and Omissions
Some transactions go unrecorded, but sum of all credits must equal sum of all debits, it is necessary for accounts to include an item creating this inequality: errors and omissions.
Surplus and Deficits
Surplus is an excess of credits. Deficit is an excess of debits.
Interdependency of Current and Financial Accounts
A current account deficit means a country consumes more than it produces; it pays for that extra output consumed through a financial account surplus. A current account surplus means a country consumes less than it produces and a part of the income generated from the sale of extra output produced corresponds to a financial account deficit.
"Imbalance in the Balance of Payments"
This is excluding central bank intervention.
"Balance in Balance of Payments"
Sum of all the items is always zero (sum of all credits is equal to sum of all debits).

The current account balance is matched by the sum of the capital account balance and the financial account balance (plus errors and omissions). A current account deficit is matched by a surplus in the other three items combined and vice cersa.

Current Account + (Capital Account + Financial Account + Errors and Omissions)=0