Balance of PaymentsStructure of BOP

Balance of PaymentsStructure of BOP

The EquationThe Equation

Balance on the Current Account =

Balance on the Capital and Financial Account

Balance on the Current Account =

Balance on the Capital and Financial Account

The Current AccountThe Current Account

The Current Account is used to collect together the value of:

Net goodsNet services(Balance on goods and services)Net Primary IncomeNet Secondary Income (Current

Transfers)

The Current Account is used to collect together the value of:

Net goodsNet services(Balance on goods and services)Net Primary IncomeNet Secondary Income (Current

Transfers)

Net GoodsNet Goods

NET Goods = Exports of Goods - Imports of Goods

NET Goods = Exports of Goods - Imports of Goods

Net ServicesNet Services

Net Services = Exports of Services - Imports of Services

Net Services = Exports of Services - Imports of Services

Net Primary IncomeNet Primary Income

Net Primary Income = Income Credits - Income Debits

Net Primary Income = Income Credits - Income Debits

Debits Credits

Interest paid to foreign firms.Profits of foreign firms in Australia;

DividendsUndistributed profits

Payments to offshore employees

Interest received from foreign firms.Profits of Australian firms earned offshore;

DividendsUndistributed profits

Payments to offshore employees

Net Secondary IncomeNet Secondary Income

Net Secondary Income = Secondary Income Credits - Secondary Income Debits

Net Secondary Income = Secondary Income Credits - Secondary Income Debits

Secondary Income (current transfers) or non-commercial payments which could be thought as gifts in the form of:

Worker remittances to overseas people or to Australian Foreign aid (non-conditional (tied) aid) Gifts to charities

Until September 2009 this was known as Current Transfers

The Capital AccountThe Capital Account

Capital TransfersCapital Transfers is made up of two

parts.1. Capital Transfers in the form of

“Conditional” or “Tied” foreign aid.2. Purchase and sale of non-

produced, non-financial assets.

Capital TransfersCapital Transfers is made up of two

parts.1. Capital Transfers in the form of

“Conditional” or “Tied” foreign aid.2. Purchase and sale of non-

produced, non-financial assets.

Financial AccountFinancial Account

The Financial Account is made up of:

Direct InvestmentPortfolio InvestmentFinancial DerivativesOther InvestmentsReserve Assets

The Financial Account is made up of:

Direct InvestmentPortfolio InvestmentFinancial DerivativesOther InvestmentsReserve Assets

Direct InvestmentDirect Investment

Which includes equity funds (gaining ownership rights) or debts funds (loans). Direct investment can be made by both Australians buying assets abroad or lending to firms offshore which they control or by foreigners buying assets in Australia or lending to firms in Australia which they control.

Which includes equity funds (gaining ownership rights) or debts funds (loans). Direct investment can be made by both Australians buying assets abroad or lending to firms offshore which they control or by foreigners buying assets in Australia or lending to firms in Australia which they control.

Portfolio InvestmentPortfolio Investment

Commercial deals involving savings movements across national borders into assets which do not give the provider of the savings significant control of the user of these savings, e.g.

Equity securities (Shares)Debt securities (T-Bonds, T-Notes,

Debentures)

Commercial deals involving savings movements across national borders into assets which do not give the provider of the savings significant control of the user of these savings, e.g.

Equity securities (Shares)Debt securities (T-Bonds, T-Notes,

Debentures)

Financial DerivativesFinancial Derivatives

Financial derivatives such as interest rate swaps, futures and options.

Financial derivatives such as interest rate swaps, futures and options.

Other InvestmentsOther Investments

Commercial deals involving savings that are not based on securities or do not give significant control or involve affiliated companies, The main types of other investments are:

1. Trade Credit2. Loans made to intermediaries3. Currency and deposits

Commercial deals involving savings that are not based on securities or do not give significant control or involve affiliated companies, The main types of other investments are:

1. Trade Credit2. Loans made to intermediaries3. Currency and deposits

Reserve AssetsReserve Assets

Reserve assets are offshore holdings of mainly foreign currencies that the RBA may have either on deposit with overseas ADIs. These may include

1. Gold holdings2. Special drawing rights3. The reserve position at the IMF

Reserve assets are offshore holdings of mainly foreign currencies that the RBA may have either on deposit with overseas ADIs. These may include

1. Gold holdings2. Special drawing rights3. The reserve position at the IMF

Calculating the Balance on Capital and Financial Account

Capital Transfer credits - Capital transfer debits = Balance on Capital Account

Net Direct Investment inflow + Net Portfolio Investment inflow + Net Other Investment Inflow + Net Change in Reserve Assets = Net Financial Inflow or Financial Balance

Balance on Capital Account + Financial Account Balance = Balance on Capital and Financial Account