ECO3024F - International Finance - Chapter 13

Balance of Payments

A statement that records all monetary transactions between residents of a country and the rest of the world over a given time period

Purpose of the Balance of Payments

Main purpose is to assist the government in developing monetary, fiscal and trade policies

Credit trnsactions

Transactions involving the payment of funds from foreign sources

Debit transactions

Transactions in which funds are paid to foreign sources

Balance of Payments consists of:

Current account, Financial account, capital transfer account, unrecorded transactions.

Current Account

Net foreign Investment

Current Account: Visible trade

Net export and import of goods (tangible). e.g purchase of raw materials, intermediate and finished goods.

Current account: Invisible trade

Net export and import of goods (intangible). Primarily shipping, IT, banking and insurance services.

Current account: Unilateral transfer to and from abroad

Gifts or donations sent by a non-resident relative to a resident of a country.

Current Account: Income receipts and Payments

Income earned by South Africans living in other parts of the world. property rent, capital interest and investment profits for example.

Current Account Surplus

A country's foreign assets are growing faster than its liabilities.

Net foreign investment is positive.

Net lender to RoW.

Stimulates domestic production and income.

Current Account Deficit

A country's foreign liabilities are growing faster than its foreign assets.

Net foreign investment is negative.

Net borrower from RoW.

Dampens domestic Production and Income

Capital Transfer Account

Separate item reflecting capital transfers payments (typically non-market, non-produced, or intangible assets like debt forgiveness, copyrights and trademarks).

Financial Account

Records all financial assets and liability transactions (flows of financial assets).

Financial Account: Direct Investment

Includes transactions involving the acquisition of share capital in foreign countries through the establishment of new businesses or through merger and takeovers.

Financial Account: Portfolio Investment

The purchase of assets such as stocks or bonds by foreigners and South Africans in South Africa and abroad.

Financial Account: Other investment

Includes trade credits, loans, currency and deposits as well as other liabilities.

Financial account inflow

Foreigners make loans to domestic residents by purchasing domestic assets

Financial account outflow

Domestic citizens lend to foreigners by acquiring foreign assets.

Gross Domestic Product (GDP)

Value of all final goods and services produced within a country in a given period.

Gross National Product (GNP)

The value of all final goods and services produced by a nation's factors of production in a given period.

GDP Forumula

GNP - (factor payments from foreign countries) + (factor payments to foreign countries)

Net National Product (NNP)

GNP - (Depreciation) + (unilateral transfers) - (indirect business taxes)

National Savings(S)

National income (Y) that is not spent on consumption (C) or government purchases: S = Y - C - G

Open Economy Savings

Save by building up its capital stock or acquiring foreign wealth: S = I + CA

Private savings

Part of disposable income(y-t) that is saved rather than consumed: S^p = Y - T - C

Government Savings

Net tax revenue: T - G: S^g = T - G

Official (international) Reserve Assets

Foreign assets held by central banks to cushion against financial instability

Official settlements balance

Negative value of the official reserve assets.

The sum of the current account, the capital transfer account, the non-reserve portion of the financial account, and the unrecorded transactions.