Prof. Dr. Franke-Viebach § 2: Definition and Rules 2.1 Overview 2.2 The Current Account 2.3 The Capital Account 2.4 Financial Account 2.5 Balance of Payment Equilibrium 2.6 Net Errors and Omissions 1 Chapter 1: The Balance of Payment (BoP) Bibliography: Harms (2016), pp. 15-33
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Chapter 1: The Balance of Payment (BoP) · 2.5 Balance of Payment Equilibrium 2.6 Net Errors and Omissions 1 Chapter 1: The Balance of Payment (BoP) Bibliography: Harms (2016), pp.
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Prof.Dr.Franke-Viebach
§ 2: Definition and Rules
2.1 Overview
2.2 The Current Account
2.3 The Capital Account
2.4 Financial Account
2.5 Balance of Payment Equilibrium
2.6 Net Errors and Omissions
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Chapter 1: The Balance of Payment (BoP)
Bibliography: Harms (2016), pp. 15-33
Prof.Dr.Franke-Viebach
2.1 Overview(1) Definition
BoP reports all economic transactions between domestic residents and foreign residents for a special time period.
- “reports”:
- “transactions”, “time period”:
- “domestic residents”:
*Problem 1 of the exercise to § 2
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(2) Classifying the transaction—Two criteria
(a) Asset transaction versus Goods transaction
- “goods” in a broad sense
- asset transaction
(b) Exchange versus unilateral transfer
- exchange
- unilateral transfer
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(3) Subdivision of the BoP in accounts
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International transactions
Goods (exchange and transfer)
Assets
Current account
transfers exchanges
Capital account
Financial account
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(4) Exhibit 2.1 (4) Empirical example: German BoP in 2014. All numbers are in billions of Euros.
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Source: Harms (2016), preliminary version
p. 2
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(5) Principles of recording transactions
(a) Distinction between deficit entries and credit entries
- credits: transaction leads to an inflow of payment
- debits: transaction leads to an outflow of payment
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(b) Balance: “sum of credits” minus “sum of debits”
(c) Double-entry bookkeeping
- each transaction is registered twice
- immediate implication: (2.1)
*Problem 2 of the exercise to § 2
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CAt +KAt = FAt
Prof.Dr.Franke-Viebach
2.2 The Current Account(1) Survey
- transactions in goods, services and factor services
- exchanges and “current transfers”
(2) Goods and services account
- sales of goods or services to foreign residents
“exports”
credit
- purchases of goods or services from abroad
“imports”
debit
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- balance: net exports
- trade costs
fob
cif
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NXt = (EXG � IMG) + (EXS � IMS)
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- Exhibit 2.2 (2): Germany’s service trade 2009 - 2013
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Source: Harms (2016),
preliminary version
p. 4
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(3) Primary income - income from supply of factor services:
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sale of factor service (“export”)
receipt of factor income
inflow of payment
credit entry
purchase of factor service (“import”)
bill of factor cost
outflow of payment
debit entry
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- example of trade in labour services
- example of trade in capital services
- empirical example: Germany 2014
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Exhibit 2.1 (4)
Source: Harms (2016),
preliminary version
p. 2
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(4) Secondary income account(a) Basics
- current transfers:
- more precisely: the account registers counter-entries for current transfers
- example:
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(b) “current” transfers: directly affect the disposable income
(c) Empirical example: Germany 2014
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Exhibit 2.1 (4)
Source: Harms (2016),
preliminary version
p. 2
Prof.Dr.Franke-Viebach
(c) Types of current transfers
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- payments between governments or within institutions
- cross-border and payments by non-governmental organizations
-personal transfer sent by individuals
- empirical example:Personal transfers received as a percentage share of GDP in 2013. Source: Harms (2016), p. 6
Prof.Dr.Franke-Viebach 18
Personal transfers received as a percentage share of GDP in 2013
Source: Harms (2016),
preliminary version
p.6
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(5) Balance on current account (2.8)
BPI=
BSI=
- empirical example: Germany 1971 - 2014 (% of GDP).
Source: Harms (2016), p 7
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CAt = NXt +BPIt +BSIt
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Components of the German current account (in percent of GDP)
Source: Harms (2016), preliminary version p.7
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- empirical example: 2009 - 2013
Source: Harms (2016), preliminary version p.8
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2.3 The Capital Account (1) Concept
- transfer that …
… change a country’s wealth
… without being driven by saving of that country
- two very different components:
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(2) Capital transfers
- transfer of assets or liabilities
change of stock variables
- more precisely: country-entries of capital transfers
first entry:
second entry:
- examples:
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(3) Acquisition and disposal of “non-produced, non-financial assets”
- non-produced, non-financial assets:
natural resources:
leases and licenses
marketing assets:
- purchase of such assets abroad, enters as a debit in the capital account
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(4) Empirical example: Germany 2014
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Source: Harms (2016),
preliminary version
p. 2
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2.4 Financial Account(1) Basics
- changes of a country’s assets and liabilities towards the rest of the
- increases in assets and liabilities towards the row: credit
- decrease: debit
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world (row) that are due to transactions with foreign residents
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= (increase - decrease of foreign assets)
- (increase - decrease of foreign liabilities)
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FAt
= net increase of foreign assets (“capital export”)
- net increase of foreign liabilities (“capital import”)
= change of foreign assets
- change of foreign liabilities
= change of (foreign assets - foreign liabilities)
= change of net foreign assets
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(2) ExampleThe following financial transfers are done in a given period:
(a) Domestic residents lend 2000 € to the row
(b) Domestic residents borrow 1000 € from the row
(c) Domestic residents repay outstanding foreign debt of 700 €
(d) Domestic residents receive repayments of 200 € on loans outstanding
Please calculate the balance on financial account!
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(3) Sub-account(a) FDI:
- changes of assets and liabilities in order to actively manage a foreign company
- in practice:
- empirical example: Germany 2014
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Germany 2014
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Source: Harms (2016),
preliminary version
p. 2
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(b) Portfolio investment
- transaction in debt or equity securities other than those included in
- in other words:
- empirical example: Germany 2014
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direct in-vestment or reserve assets (see below)
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Germany 2014
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Source: Harms (2016),
preliminary version
p. 2
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- financial derivatives and employee stock options
- empirical example: Germany 2014
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Germany 2014
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Source: Harms (2016),
preliminary version
p. 2
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(d) Other investment
- concretely:
loans
trade credit
currency and deposits
- general features:
- Germany 2014:
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Germany 2014
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Source: Harms (2016),
preliminary version
p. 2
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(e) Reserve assets
- extend assents that …
… are held by the central bank
… can be used immediately to buy currencies
- “immediately” usable
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(4) Empirical examples(a) Germany
1971 - 2014
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Source: Harms (2016),
preliminary version p.13
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2.5 Balance of Payments Equilibrium
(1) Implication of double-entry accounting principle
(2.1)
Example:
-
-
-
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FAt = CAt +KAt
CAt = 50 > 0
KAt = �10 < 0
FAt = 50� 10 = 40
Prof.Dr.Franke-Viebach
surplus is invested in claims against the row
we will get future payments from abroad
means that …
… in period t, we have lived beyond our means
… we have accumulated debt towards the row
commitment to make payments to row in the future
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FAt = 50� 10 = 40 > 0
FAt < 0
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(2) Implication: two views of the current account- modern view:
- traditional view:
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CAt = FAt �KAt
CAt = NXt +BPIt +BSIt
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(3) “Equilibrium” of the BoP (2.1)
- implication:
distribution only used for sub-balances
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CAt +KAt � FAt = 0
- most prominent:
reserve-assets
part of the financial account
(2.2) CAt +KAt = FANRt +�Rt+1 FAt
(2.3) CAt +KAt � FANRt = �Rt+1
*Problem 3 of the exercise to § 2
Prof.Dr.Franke-Viebach
2.6 Net Errors and Omissions(1) Additional balance in the practice of BoP statistics
- in practice:
(2.4)
- interpretation:
additional balance because CA, KA, FA are estimated to some extend