The Balance of PaymentsUnderstanding the components

Structure of the BOPCurrent Account Capital and Financial

AccountGoods Credits +Goods Debits +Net Services =BOGS +Net primary income +Net secondary income

=Balance on Current Account

Capital Account PlusFinancial Account

Direct Investment +Portfolio Investment +Other Investments +Reserve Assets +Financial Derivatives

= Financial Account

= Balance on Capital and Financial Account

Net errors and omissions

Pre-learningDefine

ExportsImportsCreditDebitServices

You need to know the definition of each of these to understand the

BOGS

The Balance on Goods and ServicesGoods Credits

Goods Debits

Goods Balance

Net Services

Pre-learningInvestmentBorrowingLendingForeign ownershipInterestRentProfitDividendsDeficitSurplus

You need to understand all of these ideas to understand the net

primary income

Income credits + Income debits = net primary income

Income credits Income debits

Pre-learningUnrequitedInsuranceAidPensions

You need these ideas for net secondary income, but

this is a small and relatively insignificant part of the

BOP

secondary credits +secondary debits = net secondary incomecredits debits

Each of the flows on the Current Account are NON-

REVERSIBLE.

Now you should get the balance on current

account…you just add all of the bits together. Some may be positive numbers, some

negative, so watch the signs…

Balance on Current AccountAdd together:Goods BalanceNet servicesNet primary incomeNet secondary incomeTo get the Balance on Current

Account

List the things that you don’t get:

Pre-learningMigrants can bring

capital with them:

Foreign aid can be capital items:

Intellectual property can be traded across nations:

To get the capital account, you need to know these things:

Capital AccountCapital transfers

Capital brought by migrants

Intellectual property

Pre-learningInvestmentSharesSecuritiesDerivativesTrade creditsLoans

This bit is tricky…you need to get the

meaning of all of this first…then you can understand the

credit and debit flows on the

financial account. Tricky…

Direct Investment

Portfolio Investment

Other investment

Pre-learningMonetary goldSpecial drawing

rightsThe IMFThe RBAForeign exchange

Reserve assets…small but important. You need to get all of

this first…

Reserve Assets

Pre-learning…so what is a derivative?

What has each of these

images to do with

derivatives?

Financial DerivativesWhat are they:

Credits and debits:

Balance on Capital and Financial AccountAdd together:Capital AccountWith the Financial Acc

FDIPortfolio IOther investmentsFinancial DerivativesReserve Assets

To get the Balance on Capital and Financial

accountAdd net errors and omissions to

balance the balance of Payments

Net errors and omissions

I am green about:

I am orange about: I am red about:

Key links…some pre-learningExplain each of these things:

The balance of payments balancesThe floating dollar makes the balance of

payments balanceThe difference between the principle and the

interest on a loanThe difference between foreign investment and

returns on investmentThe difference between equity and debt