Scribd
Upload
42 views19 pages

The Components of The Balance of Payments

The document summarizes key aspects of a country's balance of payments accounts, which record international transactions. It discusses the current account, capital account, and official financing account. It explains that exports and imports affect the supply and demand of a country's currency. The exchange rate adjusts to balance the accounts. Trade deficits can be problematic if persistent and used to finance consumption rather than investment.

Uploaded by

Muhammed Taha Shahid
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
42 views19 pages

The Components of The Balance of Payments

The document summarizes key aspects of a country's balance of payments accounts, which record international transactions. It discusses the current account, capital account, and official financing account. It explains that exports and imports affect the supply and demand of a country's currency. The exchange rate adjusts to balance the accounts. Trade deficits can be problematic if persistent and used to finance consumption rather than investment.

Uploaded by

Muhammed Taha Shahid
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 19

The International Balance of Payments

The components of the balance of payments:


Current account Capital account Official financing

National income determination and foreign trade

Economies are becoming more open (in terms of trade as % of GDP), but some countries are more open than others
Exports and imports as % of GDP 199 #auritius $ambia 'hi(e 'hina +, .rgentina /ang(adesh 0ndia /ra1i( +nited 2tates 153 99 &) !9 -1 15 ! 17 14 20 ! %& &* && -) ) "% 31 30 23 " 121

2ource3 4or(d /an5 4or(d De6e(opment 0ndicators

7 8igher degree of openness 9: structure of production and emp(o;ment, and economic gro<th, are more (i5e(; to be affected b; e=terna( e6ents 7 >he ba(ance of pa;ments pro6ides and indication of ho< international trade and external events feed bac5 into the macroeconom; 7 >his presentation describes how balance of payments acco nts are recorded and then e=p(ores the link bet<een the ba(ance of pa;ments and a countr;?s exc!an"e rate

#!e balance of payments $%oP& acco nts


A countrys balance of payments accounts record its international trading position and its lending and borrowing 9: records transactions bet<een countries

Each transaction is c(assified according to the pa;ment or receipts that it generates


@ >ransactions that generate a receipt of a payment from foreigners are a credit item in the accounts <ith a ' sign >hese represent a supply of foreign exchange (A) and a demand for the local currency (B) @ >ransactions that comprise a payment to foreigners are reported as a debit item <ith a ( sign 9: >hese represent demand for foreign exchange (A) and a supply of the local currency (B)

#!ree %alance of Payments $%oP& )cco nts


a) >he ba(ance of pa;ments on * rrent )cco nt b) >he ba(ance of pa;ments on *apital )cco nt c) >he ba(ance for +fficial ,inancin"
(International reserves account operated by central bank)

Let us consider two countries:


7 the United ingdom:
@ local or domestic @ currency: !ritish pounds (")

7 the United #tates:


@ foreign @ currency: U# follars ($)

a) >he ba(ance of pa;ments on 'urrent .ccount


Cecords transactions arising from trade in "oods and services 7 >he visible trade ba(ance
@ pa;ments and receipts from the importDe=port of tangib(e goods (cars, food, te=ti(es,)

7 >he invisibles trade ba(ance


@ pa;ments and receipts for financia( ser6ices, shipping and tourism, interest and di6idends pa;ments on in6estments, etcE

b& #!e balance of payments on *apital )cco nt


Cecords transactions re(ated to international movements in the o<nership of financial assets 7 >he purchase of foreign investments by UK citizens brings assets to the +, (in e=change for mone;) and are referred to as a capital outflow
@ to purchase these foreign assets, (oca(s ha6e to b y => debit (negati6e) entr; in the 'apita( .ccount

b& #!e balance of payments on *apital )cco nt $cont.&


7 Foreign investment into the UK increases +, (iabi(ities to foreigners, and it is a capital inflow
@ foreigners ha6e to b y / to underta5e their in6estments credit (positi6e) entr; in the 'apita( .ccount

>he 'apita( .ccount is further di6ided into short%term and long%term capita( f(o<s

7 >he supply of Bs ref(ects imports to the +, and +, purchases of foreign assets


9: outflows in the +, ba(ance of pa;ments

7 >he demand for Bs ref(ects +, exports and sa(es of +, assets to foreigners


inflows in the +, ba(ance of pa;ments

7 >he exchange rate is the price of the B in terms of other currencies (eEgE A) 7 0f the e=change rate is freely floating then it <i(( adFust to ensure that the demand for Bs 9 the supp(; of Bs inf(o<s 9 outf(o<s in the /oP /oP is e=act(; 9 1ero 7 2ince /oP 9 'urrent .ccount G 'apita( .ccount3
@ a 'urrent .ccount surp(us 9: a 'apita( .ccount deficit @ a 'urrent .ccount deficit 9: a 'apita( .ccount surp(us

c& #!e balance for +fficial ,inancin"


7 0f the e=change rate is fixed, and there is a /oP deficit outf(o<s : inf(o<s supp(; of Bs : demand for Bs 7 >he 'entra( /an5 must offset this e=cess supp(; of Bs b; bu;ing them <ith foreign currenc; (A)H iEeE runs do<n its reser6es of foreign e=change

c& #!e balance for +fficial ,inancin" $cont&


>he ba(ance for officia( financing sho<s the net increase or decrease in a countr;?s ho(dings of foreign currenc; reser6es3
@ . decrease in the officia( reser6es is reported as a credit item (G), since it in6o(6es the purchase of Bs @ an increase is reported as a debit item (I)

9: 0f the e=change rate is freely floatin", then the ba(ance for officia( financing is 0ero

7 >he ba(ance of pa;ments must a(<a;s ba(ance since the accounts are constructed such that this must be true b; definition
@ 8o<e6er, there can be measurement error and unreported borro<ing from abroad and other i((ega( acti6ities >he discrepanc; represents a combination of unrecorded current and capita( account transactions

7 >his reJuires the inc(usion of <hat is referred to as a balancing item& to ensure the accounts ba(ance in practice

1ational 2ncome 2dentities and t!e * rrent )cco nt %alance


Ceca(( the aggregate e=penditure eJuation in our stud; of macroeconomics3 A' ((A)) ( * + I + , + - % . 7 Kea5ages are3 #+/+. 7 0nFections are3 I+,+9: 0n eJui(ibrium3 inFections 9 (ea5ages #+/+.(I+,+-

>he ba(ance of pa;ments on 'urrent .ccount cou(d be reI<ritten as3


( - % . ) 9 ( / % ,) G ( # % I )

(. % -) trade deficit

or 9 (, % /) G (I % #) 9 go6ernment G pri6ate sector ba(ance ba(ance

>rade deficit 9 go6ernment deficit G pri6E sector deficit

.n increase in go6tE e=penditure (,), or a reduction in pri6ate sa6ing (#) <orsens the trade ba(ance (iEeE raises trade deficit)

)re trade deficits a problem3


7 . trade deficit is not necessari(; a bad thing (eEgE <hen gro<ing domestic industries attract foreign in6estments)
@ if borro<ing is financing in6estment (<hich generates economic gro<th and income in future) then it is not a prob(em

7 8o<e6er, if a countr; persistent(; runs a trade deficit this is something to <orr; about (eEgE 6u(nerabi(it; to (oss of foreign in6estors? confidence)
@ e=cessi6e borro<ing on capita( account to finance consumption on current account <i(( incur higher interest pa;ments and e6entua((; (ead to reduction consumption

You might also like