BALANCE OF PAYMENT

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 Balance of Payments Accounts
 The BOP of a country is a systematic accounting
record of all economic transactions during a
given time period between the residents of a
country and rest of the world.
 They are composed of the following:
 The Current Account
 The Capital Account
 The Official Reserves Account
 Statistical Discrepancy
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 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.

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 Structure of Current Account
I Merchandise

II Invisibles (a + b + c)
a) Services (Travel, Transportation, Insurance,
Govt. Not classified elsewhere, Misc,)
b) Transfers (Official, Private)
c) Income (Investment Income, Compensation to
Employees)
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 The Capital Account
 The capital account measures the difference
between sales of assets to foreigners and
purchases of foreign assets.

 The capital account is composed of Foreign Direct

Investment (FDI), portfolio investments , Loans,
Banking Capital and other investments.

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 Statistical Discrepancy
 There’s going to be some omissions and
misrecorded transactions—so we use a “plug”
figure to get things to balance.

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

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 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
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 U.S. Balance of Payments Data
  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    
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 0.73 
  Overall Balance $0.30  
Official Reserve Account ($0.30)

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

3-10 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 U.S. Balance of Payments Data
  Credits Debits During the same
Current Account
1 Exports
 
$1,418.64
 
 
year, the U.S.
2 Imports   ($1,809.18)
attracted net
3 Unilateral Transfers $10.24 ($64.39) investment of
  Balance on Current Account ($444.69) $444.26 billion
Capital Account    
4 Direct Investment $287.68 ($152.44)
—clearly the
5 Portfolio Investment $474.39 ($124.94) rest of the world
6 Other Investments $262.64 ($303.27)
  Balance on Capital Account $444.26  
found the U.S.
7 Statistical Discrepancies 0.73  to be a good
  Overall Balance $0.30  
Official Reserve Account ($0.30)
place to invest.

3-11 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 U.S. Balance of Payments Data
  Credits Debits
Current Account
1 Exports
 
$1,418.64
 
 
Under a pure
2 Imports   ($1,809.18)
flexible
3 Unilateral Transfers $10.24 ($64.39) exchange rate
  Balance on Current Account ($444.69) regime, these
Capital Account    
4 Direct Investment $287.68 ($152.44) numbers would
5 Portfolio Investment $474.39 ($124.94) balance each
6 Other Investments $262.64 ($303.27)
  Balance on Capital Account $444.26  
other out.
7 Statistical Discrepancies 0.73 
  Overall Balance $0.30  
Official Reserve Account ($0.30)

3-12 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 U.S. Balance of Payments Data
  Credits Debits
Current Account
1 Exports
 
$1,418.64
 
 
In the real
2 Imports   ($1,809.18)
world, there
3 Unilateral Transfers $10.24 ($64.39) is a statistical
  Balance on Current Account ($444.69) discrepancy.
Capital Account    
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 0.73 
  Overall Balance $0.30  
Official Reserve Account ($0.30)

3-13 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 U.S. Balance of Payments Data
  Credits Debits
Current Account
1 Exports
 
$1,418.64
 
 
Including that,
2 Imports   ($1,809.18)
the balance of
3 Unilateral Transfers $10.24 ($64.39) payments identity
  Balance on Current Account ($444.69) should hold:
Capital Account    
4 Direct Investment $287.68 ($152.44) BCA + BKA = – BRA
5 Portfolio Investment $474.39 ($124.94)
6 Other Investments $262.64 ($303.27)
  Balance on Capital Account $444.26  
7 Statistical Discrepancies 0.73 
  Overall Balance $0.30  
Official Reserve Account ($0.30)
($444.69) + $444.26 + $0.73 = $0.30= –($0.30)
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 Balance of Payments and the
Exchange Rate
  Credits Debits Exchange rate $
Current Account    
1 Exports $1,418.64   P S
2 Imports   ($1,809.18)
3 Unilateral Transfers $10.24 ($64.39)
  Balance on Current Account ($444.69)
Capital Account    
4 Direct Investment $287.68 ($152.44)
5 Portfolio Investment $474.39 ($124.94)
6 Other Investments $262.64 ($303.27) D
  Balance on Capital Account $444.26  
7 Statistical Discrepancies 0.73 
  Overall Balance $0.30   Q
Official Reserve Account ($0.30)

3-15 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 Balance of Payments and the
Exchange Rate
  Credits Debits Exchange rate $
Current Account    
1 Exports $1,418.64   P S
2 Imports   ($1,809.18)
3 Unilateral Transfers $10.24 ($64.39)
  Balance on Current Account ($444.69)
Capital Account    
4 Direct Investment $287.68 ($152.44)
5 Portfolio Investment $474.39 ($124.94)
6 Other Investments $262.64 ($303.27) D
  Balance on Capital Account $444.26  
7 Statistical Discrepancies 0.73 
  Overall Balance $0.30   Q
Official Reserve Account ($0.30)
As U.S. citizens import, they are supply dollars to the FOREX market.
3-16 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 Balance of Payments and the
Exchange Rate
  Credits Debits Exchange rate $
Current Account    
1 Exports $1,418.64   P S
2 Imports   ($1,809.18)
3 Unilateral Transfers $10.24 ($64.39)
  Balance on Current Account ($444.69)
Capital Account    
4 Direct Investment $287.68 ($152.44)
5 Portfolio Investment $474.39 ($124.94)
6 Other Investments $262.64 ($303.27) D
  Balance on Capital Account $444.26  
7 Statistical Discrepancies 0.73 
  Overall Balance $0.30   Q
Official Reserve Account ($0.30)
As U.S. citizens export, others demand dollars at the FOREX market.
3-17 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 Balance of Payments and the
Exchange Rate
  Credits Debits Exchange rate $
Current Account    
1 Exports $1,418.64   P S
2 Imports   ($1,809.18) S1
3 Unilateral Transfers $10.24 ($64.39)
  Balance on Current Account ($444.69)
Capital Account    
4 Direct Investment $287.68 ($152.44)
5 Portfolio Investment $474.39 ($124.94)
6 Other Investments $262.64 ($303.27) D
  Balance on Capital Account $444.26  
7 Statistical Discrepancies 0.73 
  Overall Balance $0.30   Q
Official Reserve Account ($0.30)
As the U.S. government sells dollars, the supply of dollars increases.
3-18 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 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.

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Balances on the Current (BCA) and Capital
(BKA) Accounts of the United States

500
400
300
200
100
U.S. BCA
0
U.S. BKA
-1001982 1984 1986 1988 1990 1992 1994 1996 1998 2000
-200
-300
-400
-500

Source: IMF International Financial Statistics Yearbook, 2000

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Balances on the Current (BCA) and Capital
(BKA) Accounts of United Kingdom

40
30

20
10

0 UK BCA
-101982 1984 1986 1988 1990 1992 1994 1996 1998 2000 UK BKA
-20
-30

-40
-50

Source: IMF International Financial Statistics Yearbook, 2000

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Balances on the Current (BCA) and Capital
(BKA) Accounts of Japan

150

100

50

Japan BCA
0
Japan BKA
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
-50

-100

-150

Source: IMF International Financial Statistics Yearbook, 2000

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Balances on the Current (BCA) and Capital
(BKA) Accounts of Germany

80

60

40

20
Germany BCA
0
Germany BKA
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
-20

-40

-60

-80

Source: IMF International Financial Statistics Yearbook, 2000

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Balances on the Current (BCA) and Capital
(BKA) Accounts of China

35
30
25
20
15
China BCA
10
China BKA
5
0
-51982 1984 1986 1988 1990 1992 1994 1996 1998 2000
-10
-15

Source: IMF International Financial Statistics Yearbook, 2000

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 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.
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Balances on the Current (BCA) and Capital
(BKA) Accounts of Five Major Countries
500 China BCA
400 China BKA
300
Japan BCA
200
Japan BKA
100
Germany BCA
0
Germany BKA
-1001982 1984 1986 1988 1990 1992 1994 1996 1998 2000
UK BCA
-200
UK BKA
-300
-400 U.S. BCA
-500 U.S. BKA
Source: IMF International Financial Statistics Yearbook, 2000
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