College of Education

School of Continuing and Distance Education 2014/2015 – 2016/2017

Lecturers: Dr. Monica Lambon-Quayefio Dr. Nkechi S. Owoo Dr. William Bekoe

Session overview

• Balance of Payments is as another important approach used to analyze the macro economy. It deals with the study of macroeconomics in an open economy (i.e. an economy that trades with other countries). The session highlights the components of balance of payments, disequilibrium of balance of payments and correction of balance of payments deficit.

• Goals and Objectives • At the end of the session, the student will be able to: • Define Balance of Payments • Distinguish between the current account and capital account of balance of

payments • Analyze the basic structure of balance of payments • Differentiate between balance of payment deficit and surplus. • Explain how balance of payment deficit can be financed and corrected.

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Dr. Richard Boateng, UGBS Slide 2

What is Balance of Payment?

• Balance of Payments of a country is a systematic record of all economic transactions of a country in dealing with the rest of the world

• It presents a classification of all of the receipts country from its exports and payments on its imports in a year.

• The general rule in BOP accounting is the following:-

• If a transaction earns foreign currency for the nation, it is a credit and is recorded as a plus item.

• If a transaction involves spending of foreign currency it is a debit and is recorded as a negative item.

Slide 3

Components of Balance of Payment

Slide 4

• Items of Balance of Payments Statement

Current Account versus Capital Account

• Current Account

• The Current Account of BOP records all visible (i.e. merchandise) trade (goods), invisible trade (services) as well as unilateral transfer payments. Thus BOP on current account refers to Merchandise balance, Services balance and Unilateral Transfer balance.

• Capital Account

• Records all international transactions that involve a resident of the country concerned changing either his assets with or his liabilities to a resident of another country.

Slide 5

Reserve Account

• The Reserve Account of BOP records changes in the amount of “official” reserve assets held by a country. In Ghana, this is held by the Bank of Ghana.

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

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Expression for Balance of Payment

Slide 7

BOP = Current Account Balance + Capital Account Balance + Financial Account Balance + Reserve Balance. Balance of Payments = (X – M) + (CI – CO) + (FI – FO) + FXB Where; X-exports of goods and services M-imports of goods and services CI-capital inflows CO-capital outflows FI-financial inflows FO-financial outflows FXB-official monetary reserves

Balance of Payment Disequilibrium and Types

• Balance of Payments disequilibrium occurs when payments on a country’s imports exceeds the receipts from its exports or when the receipts from a country’s exports exceed the payments from its exports.

• Types of Balance of Payments Disequilibrium

• Deficit Balance of payment:

• Surplus Balance of Payment

Slide 8

Deficit versus Surplus Balance of Payment

• Balance of Payment Deficit

• A deficit balance of payments occurs when payments on a country’s imports exceeds the receipts from its exports

• Balance of Payment Surplus:

• Balance of Payments is said to be a surplus when the receipts from a country’s exports exceed the payments from its exports.

Slide 9

Financing of Balance of Payment Deficit

• There are short-term measures to correct balance of payments deficit:

• Borrowing from Domestic sources:

• Government borrowing domestically from the central bank

• Government borrowing domestically from the public e.g. sale of bonds

Slide 10

Financing Balance of Payment Deficit cont’d…

• Borrowing from External Sources:

• Borrowing from trading partners.

• Borrowing from international organizations such as the IMF and the World Bank.

• Borrowing from international capital markets e.g. Euro Bonds.

Slide 11

Ways of Correcting Balance of Payment Deficit

• Long-term Measures • These are expenditure switching measures required to improve the

balance of payment

• Trade Protective measures such as imposition of tariffs, quota and embargo on imported goods.

• Devaluation-causes a fall in export prices in the foreign currency, hence extending its foreign demand so that the total value of exports in the domestic currency rises.

• Exchange rate controls: Under this, all the exporters are directed to surrender their foreign exchange earnings. Foreign exchange is rationed among the licensed importers.

Slide 12