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Balance of Payments

Balance of Payments. Chapter 3. Chapter 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.

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Balance of Payments

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  1. Balance of Payments Chapter 3

  2. Chapter 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. 3.1 Canada’s 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. • N.B. when we say “a country’s balance of payments” we are referring to the transactions of its citizens and government.

  4. Balance of Payments Example • Suppose that CCN Bicycle in Barrie Ontario imports $100,000 worth of bicycle frames from Mercian Bicycles in Derby England. • There will exist a $100,000 credit recorded by Mercian that offsets a $100,000 debit at CCN’s bank account. • This will lead to a rise in the supply of Canadian dollars and the demand for British pounds.

  5. 3.2 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 • The Official Reserves Account • Statistical Discrepancy

  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. • If the credits exceed the debits, then a country is running a trade surplus. • In 2004 Canada had a trade surplus of about $28bn.

  7. The Capital Account • The capital account measures the difference between Canadian sales of assets to foreigners and Canadian purchases of foreign assets. • In 2004, Canada had a capital account deficit: this was “financed” by our trade surplus. • The capital account is composed of Foreign Direct Investment (FDI), portfolio investments and other investments.

  8. Canada’s Balance of Payments

  9. Statistical Discrepancy • There’s going to be some omissions and misrecorded transactions—so we use a “plug” figure to get things to balance. • Exhibit 3.4 shows a discrepancy of -$0.8 billion in 2002.

  10. The Official Reserves Account • Official reserves assets include gold, foreign currencies, SDRs, reserve positions in the IMF.

  11. 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

  12. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) U.S. Balance of Payments Data

  13. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) U.S. Balance of Payments Data In 2000, the U.S. imported more than it exported, thus running a current account deficit of $444.69 billion.

  14. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) U.S. Balance of Payments Data During the same year, the U.S. attracted net investment of $444.26 billion—clearly the rest of the world found the U.S. to be a good place to invest.

  15. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) U.S. Balance of Payments Data Under a pure flexible exchange rate regime, these numbers would balance each other out.

  16. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) U.S. Balance of Payments Data In the real world, there is a statistical discrepancy.

  17. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) U.S. Balance of Payments Data Including that, the balance of payments identity should hold: BCA+BKA= –BRA ($444.69) + $444.26+ $0.73 = $0.30= –($0.30)

  18. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) Balance of Payments and the Exchange Rate Exchange rate $ P S D Q

  19. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) Balance of Payments and the Exchange Rate Exchange rate $ P S D Q As U.S. citizens import, they are supply dollars to the FOREX market.

  20. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) Balance of Payments and the Exchange Rate Exchange rate $ P S D Q As U.S. citizens export, others demand dollars at the FOREX market.

  21. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 0.73 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) Balance of Payments and the Exchange Rate Exchange rate $ P S S1 D Q As the U.S. government sells dollars, the supply of dollars increases.

  22. 3.3 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.

  23. Balances on the Current (BCA) and Capital (BKA) Accounts of the United States Source: IMF International Financial Statistics Yearbook, 2000

  24. Balances on the Current (BCA) and Capital (BKA) Accounts of Japan Source: IMF International Financial Statistics Yearbook, 2000

  25. Balances on the Current (BCA) and Capital (BKA) Accounts of Five Major Countries Source: IMF International Financial Statistics Yearbook, 2000

  26. Summary • Balance of payments: A statistical record of a country’s international transactions; • Three main categories: • Current Account- exports and imports of goods and services; • Capital Account- purchases and sales of financial assets; • Reserve Account- net foreign exchange reserves. • A surplus in one account is either matched by a deficit in the other, or a change in net reserves;

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