8/6/2019 Eun Resnick Balance of Payment
1/31
8/6/2019 Eun Resnick Balance of Payment
2/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-1
ChapterThree Outline
Balance of Payments Accounting
Balance of Payments Accounts
The Current Account The Capital Account
Statistical Discrepancy
Official Reserves Account
The Balance of Payments Identity
Balance of Payments Trends in MajorCountries
8/6/2019 Eun Resnick Balance of Payment
3/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-2
Balance of Payments Accounting
The Balance of Payments is the statistical record
of a countrys international transactions over a
certain period of time presented in the form ofdouble-entry bookkeeping.
N.B. when we say a countrys balance ofpayments we are referring to the transactions of
its citizens and government.
8/6/2019 Eun Resnick Balance of Payment
4/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-3
Balance of Payments Example
Suppose that Maplewood Bicycle inMaplewood Missouri, USA imports
$100,000 worth
of bicycle frames fromMercian Bicycles in Darby England.
There will exist a $100,000 credit recordedby Mercian that offsets a $100,000 debit at
Maplewoods bank account. This will lead to a rise in the supply of
dollars and the demand for British pounds.
8/6/2019 Eun Resnick Balance of Payment
5/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-4
The balance of payments accounts are those that
record all transactions between the residents of a
country and residents of all foreign nations. They are composed of the following:
The Current Account
Th
e Capital Account Statistical Discrepancy
The Official Reserves Account
Balance of Payments Accounts
8/6/2019 Eun Resnick Balance of Payment
6/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-5
The Current Account
Includes all imports and exports of goods and
services.
Includes unilateral transfers of foreign aid. If the debits exceed the credits, then a country is
running a trade deficit.
8/6/2019 Eun Resnick Balance of Payment
7/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-6
The Capital Account
The capital account measures the difference
between U.S. sales of assets to foreigners and U.S.
purchases of foreign assets. The U.S. enjoys about a $150,000,000,000 capital
account surplusabsent of U.S. borrowing from
foreigners, this finances our trade deficit.
The capital account is composed of Foreign Direct
Investment (FDI), portfolio investments and other
investments.
8/6/2019 Eun Resnick Balance of Payment
8/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-7
Statistical Discrepancy
Theres going to be some omissions and
misrecorded transactionsso we use a plug
figure to get things to balance. Exhibit 3.1 shows a discrepancy of $96.76 billion
in 1997.
8/6/2019 Eun Resnick Balance of Payment
9/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-8
The Official Reserves Account
Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF.
8/6/2019 Eun Resnick Balance of Payment
10/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-9
The Balance of Payments Identity
BCA + BKA + BRA = 0
where
BCA = balance on current accountBKA = balance on capital account
BRA = balance on the reserves account
Under a pure flexible exchange rate regime,
BCA + BKA = 0
8/6/2019 Eun Resnick Balance of Payment
11/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-10
U.S. Balance of Payments Data
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
8/6/2019 Eun Resnick Balance of Payment
12/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-11
U.S. Balance of Payments Data
In 1997, the
U.S. imported
more than it
exported, thus
running a
current account
deficit of$166.8 billion.
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
8/6/2019 Eun Resnick Balance of Payment
13/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-12
U.S. Balance of Payments Data
During the same
year, the U.S.
attracted net
investment of
$264.58
billionclearly
the rest of the
world found the
U.S. to be a
good place to
invest.
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
8/6/2019 Eun Resnick Balance of Payment
14/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-13
U.S. Balance of Payments Data
Under a pure
flexible
exchange rate
regime, these
numbers would
balance each
other out.
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
8/6/2019 Eun Resnick Balance of Payment
15/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-14
U.S. Balance of Payments Data
In the real
world, there
is a statistical
discrepancy.
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
8/6/2019 Eun Resnick Balance of Payment
16/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-15
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
U.S. Balance of Payments Data
Including that,
the balance of
payments identity
should hold:
BCA + BKA = - BRA
($166.80) + $264.58 + ($96.76) = $1.02= ($1.02)
8/6/2019 Eun Resnick Balance of Payment
17/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-16
Balance of Payments and the
Exchange Rate
Q
P S
D
Exchange rate $
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
8/6/2019 Eun Resnick Balance of Payment
18/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-17
Balance of Payments and the
Exchange Rate
Q
P S
D
Exchange rate $
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
As U.S. citizens import, they are supply dollars to the FOREX market.
8/6/2019 Eun Resnick Balance of Payment
19/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-18
Balance of Payments and the
Exchange Rate
Q
P S
D
Exchange rate $
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
As U.S. citizens export, others demand dollars at the FOREX market.
8/6/2019 Eun Resnick Balance of Payment
20/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-19
Balance of Payments and the
Exchange Rate
Q
P S
D
Exchange rate $
Credits Debits
Current Account
1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral Transfers $6.13 ($45.01)Balance on Current Account ($166.80)
Capital Account
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Other Investments $194.95 ($227.2)Balance on Capital Account $264.58
7 Statistical Discrepancies ($96.76)Overall Balance $1.02
Official Reserve Account ($1.02)
As the U.S. government sells dollars, the supply of dollars increases.
S1
8/6/2019 Eun Resnick Balance of Payment
21/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-20
Balance of Payments Trends
Since 1982 the U.S. has experienced continuous
deficits on the current account and continuous
surpluses on the capital account. During the same period, Japan has experienced the
opposite.
8/6/2019 Eun Resnick Balance of Payment
22/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-21
Balance of Payments Trends
U.S. Balance of Payments Trends
-200
-150
-100
-50
0
50
100
150
200
1982
1984
1986
1988
1990
1992
1994
1996
Year
Balance
ofPayments($b
)
Current Account
Capital Account
8/6/2019 Eun Resnick Balance of Payment
23/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-22
Balance of Payments Trends
Japan's Balance of Payments Trend
-150
-100
-50
0
50
100
150
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
Year
Balance
ofPayments($b
)
Current Account
Capital Account
8/6/2019 Eun Resnick Balance of Payment
24/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-23
Balance of Payments Trends
Germany traditionally had current account
surpluses.
Since 1991 Germany has been experiencingcurrent account deficits.
This is largely due to German reunification and
the resultant need to absorb more outputdomestically to rebuild the former East Germany.
What matters is the nature and causes of the
disequilibrium.
8/6/2019 Eun Resnick Balance of Payment
25/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-24
Balance of Payments Trends
Germany's Balance of Payments Trend
-80
-60
-40
-20
0
20
40
60
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
Year
Balance
ofPayments($b)
Current Account
Capital Account
8/6/2019 Eun Resnick Balance of Payment
26/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-25
REASONS OF DISEQUILIBRIUM IN
BALANCE OF PAYMENT
Fundamental Disequilibrium long run BOPdisequilibrium of a country. This may be due to factorslike :
- Changes in consumer tastes within the country orabroad which reduces exports and increases imports ofa country.
- Continuous fall in countrys foreign exchangereserves due to supply inelasticity of exports and
excessive demand for foreign goods and services.
8/6/2019 Eun Resnick Balance of Payment
27/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-26
- Excessive capital outflows to high imports.
- Low competitive strength in world markets.
- Inflationary pressures which makes exportsdearer.
Structural Changes- Technological Changes
- Import restrictions
- Deficit in BOP due to import of resources
8/6/2019 Eun Resnick Balance of Payment
28/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-27
Cyclical Fluctuations
Change in National Income w
hich
increaseimports and thus deficit in BOP.
Change in Exchange Rates
Capital Movements
Political and Economic Conditions
8/6/2019 Eun Resnick Balance of Payment
29/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-28
Measures to Correct BOP Deficit
Adjustments through Depreciation of
Countrys currency.
Devaluation / Expenditure or SwitchingPolicy
Direct Control by introducing tariff and non-
tariff barriers, import duty and excise duty
etc.
Adjustment through Capital Inflow by
increasing the domestic rate of interest.
8/6/2019 Eun Resnick Balance of Payment
30/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-29
Adjustment through Income Changes by
increasing the demand for and exports.
Simulation of Export and Import Substitutes
Expenditure reducing policies like
contractionary monetary and fiscal policies
which leads to increase in domestic interestrate to reduce money supply and reduction
government expenditure and or increase in
taxes.
8/6/2019 Eun Resnick Balance of Payment
31/31
McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights3-30
End ChapterThree