Balance of payment

BALANCE OF PAYMENTOF ACCOUNTING SYSTEM

BOP

AMIRAH,UITM

WHAT IS BOP?O Transactions include payments for the

country's exports and imports of goods, services, financial capital, and financial transfers.

O Double-entry booking system (debit & credit)

O surplus / deficit O Supplies vital information - national

economy & likely changes in its fiscal & monetary policy

O Highlight a country's competitive strengths and weaknesses

O Achieving balanced economic- growth.

Why is BOP important to international businesspeople

O BOP statistics help identify emerging market for good and services

O They can warn of possible new policies that may alter a country’s business climate, thereby affecting the probability of a firm’s operation in that country.

O They can indicate reduction in a country’s foreign reserve, which may mean that a country’s currency will depreciate in the future.

O They can signal increased in the risk of lending to a particular country.

BALANCE OF PAYMENT

The BOP accounting system can be divided conceptually into 4 major account,which is:

CURRENT ACCOUNT

CAPITAL ACCOUNT

OFFICIAL RESERVE ACCOUNT

ERROR AND OMISSION ACCOUNT

CURRENT ACCOUNT

EXPORT AND IMPORT OF

MERCHANDISE

EXPORT AND IMPORT OF SERVICE

INCOME ON INVESTMENT

GIFT/ UNILATERAL TRANSFERS

EXPORT AND IMPORT OF MERCHANDISE

The first item record the exports and imports of merchandise or goods.The difference between a country exports and import of goods is called THE BALANCE OF MERCHANDISE TRADE.

If IMPORTS of merchandise is more than its country EXPORTS TRADE DEFICIT

If EXPORT of merchandise is more than its country IMPORTS TRADE SURPLUS

EXPORT AND IMPORT OF SERVICE

The second items record the sale(exports) and purchase(imports) of service to and from another country.The term TRADE IN INVISIBLES is also used to describe trade in services.

The difference between a country ‘s export of services and its import of services is called THE BALANCE ON SERVICE TRADE

INCOME ON INVESTMENT

The third item is income Malaysian residents earn from their foreign investment.This income is viewed as AN EXPORT OF THE SERVICE OF CAPITAL by Malaysian.Income earned by foreigners from their investment in Malaysia is known as AN IMPORT OF THE SERVICES OF CAPITAL by Malaysia.

GIFT/ UNILATERAL TRANSFERS

These are gift between residents of one country and another country.

CAPITAL ACCOUNT

FOREIGN DIRECT INVESTMENT

PORTFOLIO INVESTMENT

SHORT TERM

LONG TERM

FOREIGN DIRECT INVESTMENT

FDI is any investment made for the purpose of controlling the organization in which the investment is made.It

records the net balance of capital that flows out of and into the country for the purpose of exerting control over

assets.

PORTFOLIO INVESTMENT

Portfolio investment is any investment made for purpose other than control or ownership of assets.It is capital that is invested in activities that are purely profit-motivated(return) than ones made in the prospect of controlling or managing or directing the investment.It include:

SHORT TERM PORTFOLIO INVESTMENT-These are financial instrument such as shares,debt securities,treasury bills or bonds with maturity of 1 year or less.

LONG TERM PORTFOLIO INVESTMENT-These are stocks,bond,bank loans and other financial instrument issued by private and public organization that have maturity greater than 1 year and that are held for purpose other than control.

CAPITAL ACCOUNT TRANSACTIONS

MATURITY MOTIVATION TYPICAL INVESTMENT

PORTFOLIO(short term)

1 year or less Investment income or facilitation of international commerce

Checking acc balancesTime depositsCommercial paperBank loans

PORTFOLIO(long term)

More than 1 year

Investment income

Gov bills,notes,&bondCorporate stocks &bond

FOREIGN DIRECT INVESTMENT

inderterminate Active control of organization(own at least 10% of voting stock)

Foreign subsidiariesForeign factoriesInternational joint ventures

Official Reserves Account

-Records the level of official reserves held by a national government . -Used to intervene in the foreign-exchange market and in transactions with other central banks .-Four types : Gold

Convertible currencies

Special Drawing Rights

Reserve positions at the IMF

Errors And Omissions Account

O The fact of the BOP accounting system is that the BOP must balance .

O Equation : current acc + capital acc + errors & omissions + official reserves acc = 0

O Large portion of the errors and omissions is probably due to under reporting of capital account transactions .

O Sometimes , errors and omissions due to deliberate actions and frequently illegal such as drug smuggling , money laundering .

O Other are related to the current account particularly merchandise exports and trade in services .

Defining BOP Surpluses and Deficits

BOP

Current account

Trade Surplu

s = Export

s > Import

s

Trade Deficit

s =Exports <

Imports

Capital Account

Inflow Outflow

Official Settlements

Balance

THANK YOU!!!