9,10 bop revised

8/6/2019 9,10 BOP Revised

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The Balance of PaymentsThe Balance of Payments


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IntroductionThe measurement of all internationaleconomic transactions between the

residents of a country and foreignresidents is called the balance ofpayments (BOP)

The two major sub accounts of the

balance of payments are:Current account

Financial account


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Fundamentals of Balance ofPayments Accounting

The balance of payments must balanceSub accounts may be imbalanced

Three main elements to the process ofmeasuring international economicactivity include:

Identifying whatisand isnotaninternational

economictransactionUnderstanding how theflow ofgoods,services,assets,and money creates debitsand creditstotheoverall BOP

Understandingthebookkeeping proceduresforBOP accounting


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Defining InternationalTransactions

Identifying manyinternationaltransactions isordinarily not difficult

However, some

internationaltransactions are notobvious


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The BOP: BusinessTransactions

There are two types of

business transactionsthat dominate the BOP:

Realassets

Financialassets


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BOP Accounting: Double-Entry BookkeepingBOP employs anaccounting

technique calleddouble-entrybookkeeping

In this age-old

method everytransaction producesa debit and a creditof the same amount

A debit is createdwhenever:

AnassetisincreasedAliability is decreased

An expenseisincreased

A credit is created

whenever:Anassetis decreased

Aliability isincreased

An expenseisdecreased


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BOP Accounting: Double-Entry Bookkeeping

The measurement of all internationaltransactions in and out of a country

over a year is a difficult taskMistakes, errors, and statisticaldiscrepancies will and do occur

Current and capital and financial

account entries are recordedindependent of one another, nottogether as this accounting methodwould prescribe


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II- Capital and Financial Account

A. CapitalAccount

a. Capital Transfers (ownership transferoffixed assets, debtforgiveness etc)

b. Acquisition/ disposalofnon produced,

nonfinancialassets (patents,copyrights,trademarks,franchises,leases etc)


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B. Financial Account

a. Direct Investment

1. Abroad (directinvestorsofreportingcountry with directinvestmententerprisesabroad (10%orabove)

2.

InReporting

Country (forinvestmentinthereportingcountry)


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BOP

b. Portfolio Investment

1.Assets (holdingsofresidentsofreportingcountry- equities,debentures, money marketinstruments,financial derivatives)

2. Liabilities (forinvestmentsintothereportingcountry)


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BOP

C. Otherinvestments

Assets (Held by residentsofthereportingcountry - tradecredits,repurchaseagreements, depositsandcurrency)

Liabilities ( forliabilitiesofresidentsofthereportingcountry)


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BOP

d.Reserveassets (Assets with countrys

monetary authorities- monetary gold,SDRs,reserve positionsin IMF,foreigncurrency, depositsand securities)

e. Errorsand Omissions (Balancing Item)


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Major Items of India's balance of Payments (April-December, 2008)

(In $ million)

April-December

(2008-09) (P)

April-December

(2007-08) (PR)Exports 133,527 113,614

Imports 238,864 182,894

Trade Balance -105,337 -69280

Invisibles, net 68,868 53772

Current AccountBalance

-36,469 -15508

Capital Account* 16,089 82,682

Change in Reserves#(+ indicates

increase;- indicatesdecrease)

20,380 -67,174

Including errors & omissions; # On BoP basis excluding valuation; P:

Preliminary, PR: Partially revised. R: revised


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The Accounts of the Balanceof Payments

The BOP is comprised of twoprimary sub accounts:

CurrentAccount

Financial/CapitalAccount

Two additional and important sub

accounts of the BOP include:NetErrorsand OmissionsAccount

OfficialReservesAccount


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The Current AccountThis account includes allinternational economictransactions with income or

payment flows occurring withinthe year, the current period

It consists of four subcategories:

Goods trade

Services trade

Income

Current transfers

This account is typically dominatedby Goods Trade


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The Current AccountThe Balance on Trade (BOT) refersspecifically to the balance of exportsand imports of goods trade only- Flows

of income between residents and nonresidents

Merchandise trade is the core ofinternational trade and has three major

components:Manufactured goods

Agriculture

Fuels


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The Financial/Capital andFinancial Account

This account of the BOP measures

all international economictransactions of financial assets

It is divided into two majorcomponents:

CapitalAccount

FinancialAccount


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The Capital AccountThe Capital Account is made up oftransfers of:

Financial assetsThe acquisition and disposal ofnonproduced/nonfinancial assets


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The Financial AccountThe Financial Account consistsof three components:

Direct investment

Portfolio investment

Other asset investments


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Net Direct InvestmentThis is the net balance of capitaldispersed out of and into the U.S. forthe purpose of exerting control over

assetsFollows the 10% ownership thresholdrule

The source of concern over foreigninvestments in any country focuses ontwo topics:

Control

Profit


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Portfolio InvestmentThis is the net balance of capital thatflows in and out of the country but doesnot reach the 10% ownership threshold

of direct investmentIt is capital invested in activities thatare purely profit-motivated rather thanones made in the prospect of controlling

or managing the investmentThese have shown much more volatilebehavior than net direct investmentsover the past decade


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Other InvestmentAssets/Liabilities

This category consists of:

Short-term trade credits

Long-term trade credits

Cross-border loans from all types offinancial institutions

Currency deposits

Bank deposits

Other accounts receivable

Accounts payable


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Official Reserves AccountThis is the total currencyand metallic reserves heldby official monetary

authorities within thecountry

Its significance depends onwhether the country is

operating under:A fixed exchange rate regime

A floating exchange ratesystem


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The Balance of Payments--TotalThe International Monetary Fund (IMF) is themultinational organization that collects theBOP statistics for over 160 different countries

around the globe

The current, capital, and financial accountscombine to form the basic balance and is oneof the most frequently used summary

measures of the BOPThe current, capital, financial, and net errorsand omissions accounts combine to form thesummary measure known as the overallbalance or official settlements balance


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The Balance of Payments andEconomic CrisesThe sum of cross-border internationaleconomic activity can be used by

international managers to forecasteconomic conditions and in some cases,the likelihood of economic crises

The mechanics of internationaleconomic crises often follow a similarpath of development


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Capital FlightCapital flight is the suddenand shocking outflow of

capital from a nationseconomy in which it isperceived there ispolitical, economic, or

currency crisesforthcoming


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BOP key indices

Trade Balance

Merchandise Balance- Difference Between

exportsand importsofgoodsBalanceofgoodsand services- Merchandisebalance+ algebraicsum ofservicestrade

Current-accountbalance-measureofacountrysnetborrowingorlending:

+ balance=netlendingabroad

- balance= netborrowingfrom foreigners


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Savings and investment

Current-accountbalance plusthecapital

accountbalance measuresthedifferencebetween whatacountrysavesand whatitinvests

Ifacountry invests morethanitsaves,itmustborrow the differencefromabroad,importingcapital


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Other indictors

Country debtcomposition,size

Compositionofimports- whetheracountry isconsumingorinvestingborrowed funds

Paymentsbalance-Reserves- totalandchangesinreserves


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9,10 bop revised

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