Balance of Payments

1. Balance of Payments • Where New Zealand's international transactions are summarised • International transactions include the value of • Inflows and outflows of money • Financial assets and liabilities

2. Financial Account Capital Account Balance of Payments Current Account

3. 1st part to the current accountBalance on goods • Measures relationship between nations exports and imports of GOODS. • Calculated as Export receipts – Import Payments Exports of goods Export receipts Imports of Goods Import Payments

4. 2nd part to the current accountBalance on services • We sell our services overseas and we buy other services from overseas. They include tourism, insurance and transport. • Calculated as services receipts – service payments Exports of services Export receipts Import payments Import of Services

5. 3rd part to Current AccountBalance on Incomes • New Zealand Producers invest money in overseas businesses in order to earn income, and overseas producers do the same in NZ. • Net result of this = Balance on Incomes • Calculated as Income from investments aboard – incomes paid to foreign investors • e.g. Interest on savings loans and dividends on shares

6. 4th part to current accountBalance on current transfers • Nz makes payments to overseas governments in the form of international aid. • E.g Aid to assist Fiji for devastating cyclone. • Transfers also include pension payments received by the NZ government from overseas governments for their citizens that now live in NZ.

7. Current Account Balance On services Balance on goods Balance on current ‘ transfers Balance on income Value exported services minus value of imported services e.g. Transport, insurance, education etc. Tourists from overseas who spend money in NZ contribute to our exports of services Value of exported goods minus value imported goods Usually positive Includes all tangible items that can be seen, moved or stored Value of investment income received from investments overseas minus investment income paid to foreign investors e.g. Interest on savings loans and dividends on shares Value of transfers received by NZlanders minus value of transfers paid to others overseas. e.g. Money transfers from Govt aid, gifts etc

8. How to calculate Current Account • Balance on Current Account = • Balance on goods + • Balance on services + • Balance on Incomes + • Balance on current transfers

9. Current account balance 1999-2006 • Positive balances indicate a surplus, negative balances are in deficit • The goods balance has gone from a surplus of $2.1 billion in 2001 to a deficit of $4.2 billion in 2006 • - Mainly driven from rising imports • - Service balance went from deficit to small surplus • - Investment income deficit increased to over 11billion in 2006 • - result of increasing income earned by foreign investors (high foreign investment)

10. Ecotonia’s current account statistics, years 1 to 5 • Calculate the current account balances for Ecotania • Describe how these events will affect the CA balance • (a) Air NZ buys another plane from the US • (b) There is an economic downturn in NZ’s main export markets • (c) Profits of foreign-owned companies in NZ increase • (d) NZlanders donate large sums to help with disaster relief overseas

11. Capital Account Includes all transfers that involve the receipt or payment of capital transfers and the Acquisition and disposal of non-financial assets • Non financial assets include: • Debt forgiveness • Migrant transfers • Occur when people migrate from one country to another and transfer all their financial wealth to their new home country. (most significant part of the CA for NZ Think of capital in an accounting sense of transfers of money

12. Financial Account Includes all transfers between NZ and rest of the world associated with change in ownership in international financial assets and liabilities. Capital Inflows- Capital Outflows Capital Inflows Assets brought in NZ by overseas investors (Foreign investment) -NZ borrowing overseas Capital Outflows Assets brought overseas by NZ investors ( NZ Investment Abroad) -Debt repayment If NZ sells more assets to foreigners than it buys from foreigners, there will then be a financial account surplus.

13. Financial Account • Is set out using these categories • Direct investment • Investments that make up over 10% of the equity (ownership) in a company • Portfolio investment • Includes investments that make up under 10% of the equity (ownership) in a company • Other capital investment • All other investment flows (including overseas loans and deposits, overseas currency and trade credits) • Reserve assets • NZ’s official overseas reserves held by the Treasury and the RBNZ. The RBNZ hold foreign currency to allow it to intervene in the foreign currency market in the event of a currency crisis..

14. Current Account Balance • Is consistently in deficit. • NZ has experienced current account deficits since the 1970s. • Due to too much domestic demand, a lack of domestic savings and an over-valued exchange rate • This deficit has to be paid for in some way, from overseas borrowing, foreign investment or assets sales • Which account do all these components appear in? • Financial Account Balance • Is consistently in surplus – Generally considered undesirable as these are liabilities that have to be paid in the future. Thus the current account balance will be the opposite of the financial account balance.

15. New Zealand’s Balance of Payments 2005-2009 dollars amounts in millions) Year ended 31 March BalanceofPayments

16. Work book page 95 -100