Balance of Payments Accounting The Balance of Payments is the statistical record of a country’s international transactions over a certain period of time

Balance of Payments Accounting

The Balance of Payments is the statistical record of a country’s international transactions over a certain period of time presented in the form of double-entry bookkeeping.

N.B. when we say “a country’s balance of payments” we are referring to the transactions of its citizens and government.

Balance of Payments Example

Suppose that Maplewood Bicycle in Maplewood, Missouri, USA imports $100,000 worth of bicycle frames from Mercian Bicycles in Darby England.

There will exist a $100,000 credit recorded by Mercian that offsets a $100,000 debit at Maplewood’s bank account.

This will lead to a rise in the supply of dollars and the demand for British pounds.

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– The Capital Account– The Official Reserves Account– Statistical Discrepancy

Balance of Payments Accounts

The Current Account

Includes all imports and exports of goods and services (invisible trade).

Includes unilateral transfers of foreign aid. If the debits exceed the credits, then a country is

running a trade deficit. If the credits exceed the debits, then a country is

running a trade surplus. It is thought that the CA responds to changes in

income and the exchange rate.

What affects the CA?

CA deficit

0

CA(S0)

CA surplus

Domestic Income (Y)

Y0

CA(S1)Y1

S ↑ → Domestic Depreciation

J-curve Effect

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 $444,000,000,000 capital account surplus—absent 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.

What affects the KA?What affects the KA?

KA deficit

r - r*

KA surplusKA

Statistical Discrepancy

There’s going to be some omissions and misrecorded transactions—so we use a “plug” figure to get things to balance.

Exhibit 3.1 shows a discrepancy of $0.73 billion in 2000.

The Official Reserves Account

Official reserves assets include gold, foreign currencies, SDRs, reserve positions in the IMF.

The Balance of Payments Identity

BCA + BKA + BRA = 0whereBCA = balance on current accountBKA = balance on capital accountBRA = balance on the reserves account

Under a pure flexible exchange rate regime, BCA + BKA = 0

Because BRA = 0

U.S. Balance of Payments DataU.S. Balance of Payments Data

Credits DebitsCurrent Account

1 Exports $1,418.64

2 Imports ($1,809.18)

3 Unilateral Transfers $10.24 ($64.39)

Balance on Current Account ($444.69)Capital Account

4 Direct Investment $287.68 ($152.44)

5 Portfolio Investment $474.39 ($124.94)

6 Other Investments $262.64 ($303.27)

Balance on Capital Account $444.26

7 Statistical Discrepancies

Overall Balance $0.30 Official Reserve Account ($0.30)

0.73


In 2000, the U.S. imported more than it exported, thus running a current account deficit of $444.69 billion.


1 Exports $1,418.64

2 Imports ($1,809.18)









0.73


During the same year, the U.S. attracted net investment of $444.26 billion—clearly the rest of the world found the U.S. to be a good place to invest.


1 Exports $1,418.64

2 Imports ($1,809.18)









0.73


Under a pure flexible exchange rate regime, these numbers would balance each other out.


1 Exports $1,418.64

2 Imports ($1,809.18)









0.73


In the real world, there is a statistical discrepancy.


1 Exports $1,418.64

2 Imports ($1,809.18)









0.73


Including that, the balance of payments identity should hold:

BCA + BKA = – BRA

($444.69) + $444.26 + $0.73 = $0.30= –($0.30)


1 Exports $1,418.64

2 Imports ($1,809.18)









0.73

Balance of Payments and the Balance of Payments and the Exchange RateExchange Rate

Q

P

Exchange rate $ Credits DebitsCurrent Account

1 Exports $1,418.64

2 Imports ($1,809.18)









0.73

S

D


Q

P

As U.S. citizens import, they are supply dollars to the FOREX market.


1 Exports $1,418.64

2 Imports ($1,809.18)









0.73

Exchange rate $

S

D


Q

P

As U.S. citizens export, others demand dollars at the FOREX market.


1 Exports $1,418.64

2 Imports ($1,809.18)









0.73

Exchange rate $

S

D


Q

P S

D

As the U.S. government sells dollars, the supply of dollars increases.

S1


1 Exports $1,418.64

2 Imports ($1,809.18)









0.73

Exchange rate $

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, China has experienced the opposite.

Balances on the Current (BCA) and Capital (BKA) Accounts of the United States

-500

-400

-300

-200

-100

0

100

200

300

400

500

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

U.S. BCA

U.S. BKA

Source: IMF International Financial Statistics Yearbook, 2000

Balances on the Current (BCA) and Capital (BKA) Accounts of United Kingdom

-50

-40

-30

-20

-10

0

10

20

30

40

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

UK BCA

UK BKA


Balances on the Current (BCA) and Capital (BKA) Accounts of Japan

-150

-100

-50

0

50

100

150

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Japan BCA

Japan BKA


Balances on the Current (BCA) and Capital (BKA) Accounts of Germany

-80

-60

-40

-20

0

20

40

60

80

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Germany BCA

Germany BKA


Balances on the Current (BCA) and Capital (BKA) Accounts of China

-15

-10

-5

0

5

10

15

20

25

30

35

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

China BCA

China BKA


Balance of Payments and National Income Accounting GNP = Y = C + I + G + X – M Y = C + S + T X – M = (S- I) + (T- G) If a developing economy experiences large trade

deficits (X-M <0), the remedies are:1. Savings must increase, S↑2. Investment must fall, I↓3. Government spending must fall, G↓4. Taxes must rise, T↑

Documents

Balance of Payments Accounting The Balance of Payments is the statistical record of a country’s international transactions over a certain period of time