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CHAPTER 13revised

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15 views14 pages

CHAPTER 13revised

Uploaded by

kietspros
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 13

BALANCE OF PAYMENTS
WHY DO WE • When a country opens to the world economy, there are
various transactions between the citizens of the country and
NEED the rest of the world.

BALANCE • Some transactions cause inflows of USD into the country


and others cause outflows of USD out of the country.

OF • For example: Export causes an inflow of USD into the


country because the exporters receive payments in USD
PAYMENTS from foreign buyers. Vice versa, Import causes an outflow of

(BOP)? USD to foreign coutries because the importers pay USD for
the goods they buy from abroad.
• Thus, at the end of a year, if total inflows of USD are higher
than the total outflows of USD, the country is better off and
its foreign reserves (USD) increase. The country becomes
richer.
• And if the total inlfows of USD are lower than the total
outflows of USD, the country’s foreign reserves reduce and
the country becomes worse off in international business
activities.
• Therefore, the country needs an accounting book recording all
transactions that cause inflows and outflows of USD. This accounting
book is called “Balance of Payments” or BoP.

• Definition: Balance of Payments (BoP) is an accounting book that


WHY DO WE records all transactions between the citizens of a country and the
rest of the world in a certain period of time.
NEED BALANCE • Rule of recording:

OF PAYMENTS • A transaction which causes an inflow of USD into a country is


recorded as a Credit or with a “+” value.
(BOP)? • A transaction which causes an outflow of USD out of a country
is recorded as a Debit or with a “-” value.

• Example: Export value of 120,000 USD is recorded as a Credit with

+ 120,000 USD.
• 1. Current Accounts (CA): record the
following transaction types:
• Export values (Credit or “+”)
• Import values (Debit or “-”)
• Inflow of citizen income into the country from
COMPONENTS Abroad (Credit or “+”)

OF THE BOP • Outflow of foreigners’s income or remiitances


out of the country (Debit or “-”)
• Inflow of Official Development Assistance
(ODA) from other countries (Credit of “+”)
• Outflow of Official Development Assistance
(ODA) to other countries (Debit of “-”).
• 2. Capital Accounts (K): record international investment transactions. It
measures the country’s net foreign invesment, which includes:
• Inflow of Foreign Direct Investment (FDI) into the country – Credit or “+”
• Outflow of Foreign Direct Investment (FDI) out of the country – Debit or “-”
• Inflow of Foreign Portfolio Invetsment into the country – Credit or “+”
• Ouflow of Foreign Portfolio Invetsment out of the country – Debit or “-”

COMPONENTS
• Other capital transactions.

• 3. Discrepancy/ Errors and Omissions (EO)

OF THE BOP • 4. Financial Accounts (FA): record all financial transactions in cash assets
• Receiving cash from abroad (import of assets)- Cash increases - Debit or
“-”
• Paying cash to abroad (export of assets) – Cash reduces - Credit – or “+”
• Account Receivables – Debit or “-”
• Account Payables - Credit or “+”.

• Financial Accounts (FA) are counter parts of main transaction accounts


• 1. An American company buys Drills from a German
corporation, 820,000 USD.
We record it into the U.S BoP as follows:
• Debit Credit
• CA: Import of Goods: 820,000 $

EXAMPLES OF • FA: Paying cash abroad 820,000$


• 2. An American investor buys stocks of Samsung corp. 50,000$
RECORDING We record it into the US. BoP as follows:
• Debit Credit
• K: Outflow of Foreign Portfolio 50,000$
• FA: Paying Cash abroad
50,000$
(export of cash assets)
• 3. The US Government grants an ODA of 500,000 USD to
Cambodia to help them fight Covid Pandemic.
We record it into the US BoP:
Debit Credit
• CA: Outflow of ODA 500,000$
• FA: Cash outflow (cash reduces) 500,000$

EXAMPLES OF • 4. Ford Corp. sells 100 cars to Vietnam buyers. 4,000,000$

RECORDING • We record it into the US. BoP:


Debit Credit
• CA:Export of goods
4,000,000$
• FA: Receiving cash 4,000,000$
(import of cash assets)
• An U.S. citizen bought stocks issued by a New Zealand Corp.. $6,000. The New Zealand company
deposits in its own U.S. bank account in San Francisco. How is this transaction is recorded in the
US Balance of Payments?
• Answer:
• Debit Credit

• K: Outflow of Foreign Portfolio Investment 6,000$


• FA: Paying cash to abroad (export of cash asset) 6,000$
• Due to double entry book keeping, we always
have total credits = total debits:
CA + K + FA + EO = 0
• However: BoP = CA + K + EO

BOP SURPLUS • BoP may be positive or negative


• If BoP > 0 in a period: BoP Surplus, which also
AND BOP means that USD Foreign Reserves of the country
DEFICIT increase. The country is better off. It can use this
surplus to pay national debts or lend to other
countries.
• If BoP < 0 in a period: BoP Deficit, which also
means that USD Foreign Reserves of the country
reduce. The country is worse off.
BOP SURPLUS AND BOP DEFICIT

• Surpluses and deficits can be counted for individul accounts in the BoP.
• Current Account (CA) Surplus v.s Currrent Account (CA) Deficits
• Capital Account (K) Surplus v.s Capital Account (K) Deficits.
• Current Account Surplus means inflow of USD cash into the country is higher than the
outflow of USD cash. The country can use its surplus to reduce the national debts or
to lend to other countries (the country becomes the net lender). .
• Current Account Deficit means inflow of USD cash into the country is lower than the
outflow of USD cash. The country should find ways to reduce the national debts or to
borrow more from other countries to finance for the deficit (the country becomes the
net borrower).
Understanding the Data for the Balance of
Payments Account

• A country that has a current account surplus is called a (net)


lender. By the BOP identity, we know that it must have a
deficit in its asset accounts, so like any lender, it is, on net,
buying assets (acquiring IOUs from borrowers). For example,
China is a large net lender.
• A country that has a current account deficit is called a (net)
borrower. By the BOP identity, we know that it must have a
surplus in its asset accounts, so like any borrower, it is, on
net, selling assets (issuing IOUs to lenders). As we can see,
the United States is a large net borrower.
• Note: IOU means “I Owe You” or Certificate of Borrowing
BOP SURPLUS AND BOP DEFICIT

• Capital Account (K) Surplus means the country


possess more international/ foreign capital assets
of other countries. The country’s stock of
international/ foreign capital indebtedness
increases.
• Capital Account (K) Deficit means other countries
possess more of the country’s capital assets. The
country’s stock of international capital
indebtedness reduces.
• Increasing Export
• Restricting Import
• Attracting more FDI from abroad
MEASURES TO • Increasing Export of services (labor)
REDUCE BOP • Improving effectiveness of international
DEFICIT relations
• Developing Stock Markets
• Increase effectiveness of Macroeconomic
policies.
The end

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