Description
This is a presentation to introduce the student to the balance of payments.
The Balance of Payments
Lecture Objective:
INTERNATIONAL FINANCIAL MANAGEMENT
3
This lecture serves to introduce the student to the balance of payments. How it is constructed and how balance of payments data may be interpreted.
EUN / RESNICK
Second Edition
Lecture Three Outline
? Balance of Payments Accounting ? Balance of Payments Accounts
? ? ? ?
The Current Account The Capital Account Statistical Discrepancy Official Reserves Account
? The Balance of Payments Identity ? Balance of Payments Trends in Major Countries
3-1
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. ? E.g. export and imports; cross border investments in bonds, stocks, real estate etc Note: When we say “a country’s balance of payments” we are referring to the transactions of its citizens and government.
3-2
? When exports are more than imports, currency
appreciates and vice versa ? If BOP is adverse other countries may not want to do business with you; country will be forced to restrict imports and arrest capital outflows ? BOP data can be used to evaluate the performance of the country in international economic competition
3-3
? Receipts from foreigners are recorded as a credit
with a positive sign ? Payments are recorded as a debit with a negative sign
3-4
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.
3-5
Balance of Payments Accounts
? 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 ? Statistical Discrepancy ? The Official Reserves Account
3-6
The Current Account
? Includes all imports and exports of goods and
services. ? Includes unilateral transfers of foreign aid. ? If the debits exceed the credits, then a country is running a trade deficit.
3-7
Current account
? Merchandise trade: exports and imports of goods
like wheat, rice, computers etc; trade balance is the difference between exports and imports; Japan, Germany have trade surplus whereas the US has deficit ? Services: payments and receipts for legal, consulting, engineering services, royalties for patents
3-8
? Factor Income: Payments and receipts of interest,
dividends, other income on foreign investments ? Receipts are credits and payments are debits ? Unilateral transfers: Foreign aid, official and private grants, gifts ? One directional flow; country making payment will receive goodwill in return
3-9
? When currency depreciates, exports rise and
imports fall ? J curve effect: Trade balance deteriorates for some time and then improves ? J Curve effect exists in 40% of cases involving currency devaluation
3-10
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 $150,000,000,000 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.
3-11
? FDI: Setting up of capital projects, acquisitions ? Portfolio Investment: Sales and purchases of
foreign financial assets ? Other Investment: transactions in bank deposits, trade credits, transactions in currency
3-12
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 $96.76 billion in 1997.
3-13
The Official Reserves Account
? Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF. ? When a country must make a net payment to foreigners because of a BOP deficit the central bank either should run down its official reserves or borrow anew
3-14
The Balance of Payments Identity
BCA + BKA + BRA = 0
where BCA = balance on current account BKA = balance on capital account BRA = balance on the reserves account
Under a pure flexible exchange rate regime, BCA + BKA = 0
3-15
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-16
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-17
In 1997, the U.S. imported more than it exported, thus running a current account deficit of $166.8 billion.
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-18
During the same year, the U.S. attracted net investment of $264.58 billion—clearly the rest of the world found the U.S. to be a good place to invest.
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
Under a pure flexible exchange rate regime, these numbers would balance each other out.
Statistical Discrepancies Overall Balance Official Reserve Account
3-19
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
In the real world, there is a statistical discrepancy.
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-20
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Including that, the balance of payments identity should hold:
BCA + BKA = - BRA
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-21
($166.80) + $264.58 + ($96.76) = $1.02= –($1.02)
Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
P
S
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
3-22
Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
P
S
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
3-23
As U.S. citizens import, they are supply dollars to the FOREX market.
Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
P
S
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
3-24
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
P
SS
1
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
3-25
As the U.S. government sells dollars, the supply of dollars increases.
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, Japan has experienced the opposite.
3-26
Balance of Payments Trends
U.S. Balance of Payments Trends
200 150 100 50 0 -100 -150 -200 Year -50 Current Account Capital Account
Balance of Payments ($b)
3-27
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96
Balance of Payments Trends
Japan's Balance of Payments Trend
150 100 50 0 -50 -100 -150 Year Current Account Capital Account
Balance of Payments ($b)
3-28
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96
Balance of Payments Trends
? Germany traditionally had current account
surpluses. ? Since 1991 Germany has been experiencing current account deficits. ? This is largely due to German reunification and the resultant need to absorb more output domestically to rebuild the former East Germany. ? What matters is the nature and causes of the disequilibrium.
3-29
Balance of Payments Trends
Germany's Balance of Payments Trend
80
Balance of Payments ($b)
60 40 20 0 -40 -60 -80 Year Current Account Capital Account -20
3-30
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96
doc_295284779.pptx
This is a presentation to introduce the student to the balance of payments.
The Balance of Payments
Lecture Objective:
INTERNATIONAL FINANCIAL MANAGEMENT
3
This lecture serves to introduce the student to the balance of payments. How it is constructed and how balance of payments data may be interpreted.
EUN / RESNICK
Second Edition
Lecture Three Outline
? Balance of Payments Accounting ? Balance of Payments Accounts
? ? ? ?
The Current Account The Capital Account Statistical Discrepancy Official Reserves Account
? The Balance of Payments Identity ? Balance of Payments Trends in Major Countries
3-1
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. ? E.g. export and imports; cross border investments in bonds, stocks, real estate etc Note: When we say “a country’s balance of payments” we are referring to the transactions of its citizens and government.
3-2
? When exports are more than imports, currency
appreciates and vice versa ? If BOP is adverse other countries may not want to do business with you; country will be forced to restrict imports and arrest capital outflows ? BOP data can be used to evaluate the performance of the country in international economic competition
3-3
? Receipts from foreigners are recorded as a credit
with a positive sign ? Payments are recorded as a debit with a negative sign
3-4
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.
3-5
Balance of Payments Accounts
? 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 ? Statistical Discrepancy ? The Official Reserves Account
3-6
The Current Account
? Includes all imports and exports of goods and
services. ? Includes unilateral transfers of foreign aid. ? If the debits exceed the credits, then a country is running a trade deficit.
3-7
Current account
? Merchandise trade: exports and imports of goods
like wheat, rice, computers etc; trade balance is the difference between exports and imports; Japan, Germany have trade surplus whereas the US has deficit ? Services: payments and receipts for legal, consulting, engineering services, royalties for patents
3-8
? Factor Income: Payments and receipts of interest,
dividends, other income on foreign investments ? Receipts are credits and payments are debits ? Unilateral transfers: Foreign aid, official and private grants, gifts ? One directional flow; country making payment will receive goodwill in return
3-9
? When currency depreciates, exports rise and
imports fall ? J curve effect: Trade balance deteriorates for some time and then improves ? J Curve effect exists in 40% of cases involving currency devaluation
3-10
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 $150,000,000,000 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.
3-11
? FDI: Setting up of capital projects, acquisitions ? Portfolio Investment: Sales and purchases of
foreign financial assets ? Other Investment: transactions in bank deposits, trade credits, transactions in currency
3-12
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 $96.76 billion in 1997.
3-13
The Official Reserves Account
? Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF. ? When a country must make a net payment to foreigners because of a BOP deficit the central bank either should run down its official reserves or borrow anew
3-14
The Balance of Payments Identity
BCA + BKA + BRA = 0
where BCA = balance on current account BKA = balance on capital account BRA = balance on the reserves account
Under a pure flexible exchange rate regime, BCA + BKA = 0
3-15
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-16
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-17
In 1997, the U.S. imported more than it exported, thus running a current account deficit of $166.8 billion.
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-18
During the same year, the U.S. attracted net investment of $264.58 billion—clearly the rest of the world found the U.S. to be a good place to invest.
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
Under a pure flexible exchange rate regime, these numbers would balance each other out.
Statistical Discrepancies Overall Balance Official Reserve Account
3-19
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
In the real world, there is a statistical discrepancy.
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-20
U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Including that, the balance of payments identity should hold:
BCA + BKA = - BRA
$107.93 $387.62 $194.95 $264.58
Statistical Discrepancies Overall Balance Official Reserve Account
3-21
($166.80) + $264.58 + ($96.76) = $1.02= –($1.02)
Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
P
S
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
3-22
Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
P
S
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
3-23
As U.S. citizens import, they are supply dollars to the FOREX market.
Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
P
S
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
3-24
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $6.13 $1,167.61 ($1,295.53) ($45.01) ($166.80) ($119.44) ($79.28) ($227.2) ($96.76) $1.02 ($1.02) Debits
P
SS
1
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account
$107.93 $387.62 $194.95 $264.58
D Q Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
3-25
As the U.S. government sells dollars, the supply of dollars increases.
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, Japan has experienced the opposite.
3-26
Balance of Payments Trends
U.S. Balance of Payments Trends
200 150 100 50 0 -100 -150 -200 Year -50 Current Account Capital Account
Balance of Payments ($b)
3-27
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96
Balance of Payments Trends
Japan's Balance of Payments Trend
150 100 50 0 -50 -100 -150 Year Current Account Capital Account
Balance of Payments ($b)
3-28
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96
Balance of Payments Trends
? Germany traditionally had current account
surpluses. ? Since 1991 Germany has been experiencing current account deficits. ? This is largely due to German reunification and the resultant need to absorb more output domestically to rebuild the former East Germany. ? What matters is the nature and causes of the disequilibrium.
3-29
Balance of Payments Trends
Germany's Balance of Payments Trend
80
Balance of Payments ($b)
60 40 20 0 -40 -60 -80 Year Current Account Capital Account -20
3-30
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96
doc_295284779.pptx