PAYMENTS AMONG NATIONS
What??s the Balance of Payment?
A set of accounts recording all flows of value between a nation??s residents and the residents of the rest of the world during a period of time.
The balance of payments is a statistical statement that systematically summarizes, for a specific period of time, the economic transactions of an economy with the rest of the world. (IMF definition)
Who sets the standard?
IMF BOP Manual
International standard for conceptual framework underlying balance of payments statistics.
1948, 1950, 1961, 1977, 1993
1.Merchandise trade flows (goods flows)
4.Unilateral transfers (gifts)
5.Private capital flows (nonofficial flows of financial assets) 6.Official reserve asset flows
1.Each transaction enters the accounts twice: as a credit and a debit of the same value at the same time.
2.A credit(+) is a flow for which the country is paid. 3.A debit(-) is a flow for which the country must pay.
Principles for Double-Entry
1.Exports of goods and services
3.Income being paid
1.Imports of goods and services
3.Income paid to foreigners
Capital inflow (credit)
1.Reduction in an economy??s foreign assets
2.Increase in assets held by foreigners
3.Reduction in foreign liabilities to domestic residents 4.Increase in liabilities to foreigners
Capital outflow (debit)
1.Increase in an economy??s foreign assets
2.Reduction in assets held by foreigners
3.Increase in foreign liabilities to domestic residents 4.Reduction in liabilities to foreigners
Some Concepts (1)
1.Trade balance : net balance of trade in goods and services 2.Current account balance (CA): balance on goods, services, income and gifts
3.Private capital account balance (KA): net flows of financial assets and similar claims
4.Overall balance (B) =current account balance + private capital account balance = (negative of) the official reserve balance (OR)
1.CA=Merchandise trade flows (goods flows)+Service flows+Income flows+Unilateral transfers (gifts)
2.KA=Private capital flows (nonofficial flows of financial assets) 3.OR=Official reserve asset flows
Some Concepts (2)
1.Statistical discrepancy : net result of errors and omissions on both credit and debit.
2.Official reserve assets includes: gold, foreign exchange assets, reserve position with IMF, and SDRs
SDR = 0.888671 grams of fine gold = one U.S. dollar (1969) SDR = a basket of currencies (1973)
SDR = a basket of Euro, Yen, Pound, and USD
The USD-value of the SDR is posted daily on the IMF's website. The basket composition is reviewed every five years
The Current Account (CA) Balance
1. If credits equal debits, the current account balance must equal net foreign investment (If).
? CA = If
Net foreign investment: the net accumulation of foreign assets minus foreign liabilities: If has 2 components: KA & OR 2. National saving (S) versus domestic investment (Id). S = Id + If,
CA = S ?C Id
3. Domestic production (Y) versus national expenditure (E). Y = C + Id + G +(X ?C M), E = C + Id + G, and CA = (X ?C M) approximately, so that
CA = Y ?C E
Economic Meaning of CA Surplus
1.The country has positive net foreign investment (a net lender) 2.The country is saving more than it is investing domestically. 3.The country is producing more than it is spending on goods and services.
What about a deficit?
Economic Meaning of Overall Balance
1.The official settlements balance (B) equals the sum of CA and KA (net private capital flows).
2.Official intervention by countries monetary authorities is indicated by OR.
3.If B is in surplus, there is an accumulation of OR (debit in OR)?ªthe monetary authorities buy foreign currencies
5.America in 2001 vs. China in 2007
6.China??s foreign reserves jumped from USD1066.344bn as of Dec.31, 2006 to USD1528.249bn by the end of 2007.
7.In 2001, the official settlements balance for the United States was zero.
International Investment Position
1.Balance of payments accounts record flows of transactions 2.International investment position: a statement of the stocks of a nation??s international assets and foreign liabilities at a point in time.
3.Flows changes stocks / changes in market values
Links between the two accounts
1.A lender vs. a borrower : current accounts surplus vs. deficit during a period of time
2.A creditor vs. a debtor : net stock of foreign assets positive or
negative at a point in time