The Balance of Payments

Definition

Accounting system measuring all economic transactions between the residents of one country and the rest of the world

Categories

credits: capital inflows (+)

debits: capital outflows (-)

credits debits

a. exports of goods imports of goods

credits debits

a. exports of goods imports of goods

a = Trade Balance

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment into Canada long-term private investment from Canada

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment intoCanada

long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment intoCanada

long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

d + e + f + g = Capital Account Balance

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment intoCanada

long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

d + e + f + g = Capital Account Balance

h. purchase of currencies and/or gold by thegovernment

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment intoCanada

long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

d + e + f + g = Capital Account Balance

h. purchase of gold and/or other currencies by thegovernment

h = Official Reserve Balance

Note

By now, the BOP should be …balanced, that is,

Current Account + Capital Account + Official Reserve Balance = 0

What if still unbalanced?

The Fudge Factor

Use an old accounting trick:

credits debits

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment intoCanada

long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

d + e + f + g = Capital Account Balance

h. purchase of gold and/or other currencies by thegovernment

h = Official Reserve Balance

i. errors and omissions

Exemplification

1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank.

2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan.

3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank.

4. A Canadian tourist travels to Germany and spends C$0.04 m

5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

credits(+) debits(-)

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada

(1) C$1 m deposit for Haiti

short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment into Canada long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

(1) C$1 m loan for Haiti

d+e+f+g = Capital Account Balance

h. purchase of gold and/or other currencies bythe government

g = Official Reserve Balance

i. i. errors and omissions

Exemplification

1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank.

2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan.

3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank.

4. A Canadian tourist travels to Germany and spends C$0.04 m

5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

credits(+) debits(-)

a. exports of goods:

(2) C$1 m worth of wheat to Haiti

imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

(2) C$1 m worth of wheat to Haiti

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment into Canada long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

d+e+f+g = Capital Account Balance

h. purchase of gold and/or other currencies bythe government

g = Official Reserve Balance

i. i. errors and omissions

Exemplification

1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank.

2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan.

3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank.

4. A Canadian tourist travels to Germany and spends C$0.04 m

5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

credits(+) debits(-)

a. exports of goods imports of goods

a = Trade Balance

b. exports of services

(3) C$0.04 in interest from German bonds

imports of services

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

(3) C$0.04 in interest from German bonds

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment into Canada long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

d+e+f+g = Capital Account Balance

h. purchase of gold and/or other currencies bythe government

g = Official Reserve Balance

i. i. errors and omissions

Exemplification

1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank.

2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan.

3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank.

4. A Canadian tourist travels to Germany and spends C$0.04 m

5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

credits(+) debits(-)

a. exports of goods imports of goods

a = Trade Balance

b. exports of services imports of services

(4) C$0.04 Canadian tourist in Germany

c. unilateral transfers

a + b + c = Current Account Balance

d. short-term capital into Canada

(4) C$0.04 Canadian tourist in Germany

short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment into Canada long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

d+e+f+g = Capital Account Balance

h. purchase of gold and/or other currencies bythe government

g = Official Reserve Balance

i. i. errors and omissions

Exemplification

1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank.

2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan.

3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank.

4. A Canadian tourist travels to Germany and spends C$0.04 m

5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

credits(+) debits(-)

a. exports of goods

(5) C$0.8 m worth of aid to Somalia

imports of goods

a = Trade Balance

b. exports of services imports of services

c. unilateral transfers

(5) C$0.8 m worth of aid to Somalia

a + b + c = Current Account Balance

d. short-term capital into Canada short-term capital from Canada

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment into Canada long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

d+e+f+g = Capital Account Balance

h. purchase of gold and/or other currencies bythe government

g = Official Reserve Balance

i. i. errors and omissions

credits(+) debits(-)

a. exports of goods:

(2) C$1 m worth of wheat to Haiti

(5) C$0.8 m worth of aid to Somalia

imports of goods

a = Trade Balance

b. exports of services

(3) C$0.04 in interest from German bonds

imports of services

(4) C$0.04 Canadian tourist in Germany

c. unilateral transfers

(5) C$0.8 m worth of aid to Somalia

a + b + c = Current Account Balance

d. short-term capital into Canada

(1) C$1 m deposit for Haiti

(4) C$0.04 Canadian tourist in Germany

short-term capital from Canada

(2) C$1 m worth of wheat to Haiti

(3) C$0.04 in interest from German bonds

e. short-term official lending to Canada short-term official lending from Canada

f. long-term private investment into Canada long-term private investment from Canada

g. long-term official lending to Canada long-term official lending from Canada

(1) C$1 m loan for Haiti

d+e+f+g = Capital Account Balance

h. h. purchase of gold and/or other currencies by the government

g = Official Reserve Balance

i. i. errors and omissions

Everything balances out

1 + 0.8 + 0.04 + 1 + 0.04 = 0.04 + 0.8 + 1 + 0.04 +1