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Balance of Payments
In today's class meeting, we will discuss Balance-of-Payments Accounting and components of Balance-
of-Payments accounts. we will use multiple examples to understand the mechanism.
For USA -
Credit entry -> demand for dollar will increase -> supply of foreign exchange will increase
debit entry -> supply of dollar will increase -> demand for foreign exchange will increase
Example-1:
Suppose Boeing exported a 747 aircraft to Japan Airlines for $50 million, and Japan airlines pays from its
account in Chase Manhattan Bank in NYC.
Debit Credit
Boeing export $50 million
Uddin/Lecture/BOP
Withdrawal from US Bank -$50 million
Example-2:
Suppose Boeing imports jet engines from Rolls Royce for $30 million, and Boeing makes payment by
transferring the fund to the Rolls Royce account in Chase Manhattan Bank.
Debit Credit
Boeing import -$30 million
Deposit at US Bank $30 million
Example-3:
Suppose Ford acquires Jaguar for $750 million, and Jaguar purchases US Treasury notes with the sales
proceed.
Debit Credit
Acquisition of Foreign Company -$750 million
Jaguar's purchase of Treasury $750 million
Notes
Current Account
Capital Account
Official Reserve Account
Current Account (BCA): the current account includes export and import of goods and services. it is
defined as export minus imports plus unilateral transfers. current account is divided into 4 categories.
they are described below.
legal services
consulting services
royalties
c) Factor Income: Payments and receipts of interest, dividend, and other income on previous foreign
investments
Uddin/Lecture/BOP
d) Unilateral Transfers: Unrequited payments such as
foreign aid
reparations
official and private grant
gifts
for the purpose of double entry bookkeeping system, unilateral transfers are regarded as act of buying
goodwill from the recipient countries.
trade balance is sensitive to exchange rate changes. Following a depreciation of the currency, trade
balance may deteriorate at first for a while, eventually it will improve over time. This pattern is
commonly referred to as the J-Curve effect.
Capital Account (BKA): the capital account measures the following 2 items:
There are 3 components of the capital account. They are described below:
currency transactions
bank deposits
trade credits
Statistical Discrepancy: BOP transaction recordings are not perfect. A lot of transactions such as invisible
services, are difficult to detect. Thus, BOP always shows a balancing debit or credit as statistical
discrepancy.
Uddin/Lecture/BOP
when we obtain the cumulative BOP including current account, capital account, and statistical
discrepancy, we obtain the overall balance. Overall balance indicates a country's international payment
gap that must be accommodated with the government's official reserve transactions.
Official Reserve Account (BRA): When a country face trade deficit or surplus, the central bank of the
country should take the following actions.
BOP Identity:
BCA+BKA+BRA=0
BCA+BKA=-BRA
BCA=-BKA or
BKA=-BCA
Uddin/Lecture/BOP