Balance of payments

Balance of Payments (BOP)

A country is a statement of all the international transactions of a country with the rest of the world over a period of time, usually a year. The balance of payments (BOP) is a crucial indicator of a country's currency inflows and outflows, impacting economic growth, inflation, and employment in a globalized world.

Structure of Balance of Payments Statement

Current Account; and Capital & Financial Account.

Current Account

Macroeconomic Aim of Government: A favourable position of Balance of Trade indicates the avoidance of a large and persistent balance of trade surplus or deficit.

Current account consists of 3 subdivisions:

i) Balance of Trade;
ii) Net Income Flows (Income Balance); and
iii) Net Current Transfers.

Balance of Trade

This records the import and export of goods & and services. The balance of trade shows the difference between the values of exports and imports of goods & and services goods.

A surplus in the balance of trade occurs when the value of exports exceeds the value of imports.
A deficit occurs when the value of imports exceeds the value of exports.

Net Income Flows (Income Balance)

Net income flows consist of investment income in rent, interest, profits, and dividends flowing into and out of the country. So, for example, dividends earned by a foreign resident from shares in a Singapore company would be an outflow of money.

Net Current Transfers

Unilateral flows of goods and services, including government contributions and private money transfers, are not linked to capital assets or liabilities.

Capital and Financial Account

The capital and financial account track the country's changes in assets and liabilities. In the capital and financial account, a rise in assets in a country will be recorded as a +, while a rise in liabilities will be recorded as a -.

Key components of the Capital & Financial Account include:
i) Short-term Capital Flows; and
ii) Long-term Capital Flows.

Long-term Capital Flows

Long-term capital flows involve foreign direct investment, real asset purchases, and acquisitions, involving firms acquiring long-term interest and control over enterprise management in another economy.

Short-Term Capital Flows

Hot money refers to short-term monetary flows between Singapore and the rest of the world, including cross-border loans, currency and bank deposits, inter-company debts, and non-bank financial institutions.

Overall Balance

The Balance of Payments (BOP) is a financial system that tracks international transactions between countries. Positive BOP indicates a surplus, where inflows exceed outflows, while negative BOP indicates a deficit, where outflows exceed inflows. The system is crucial for understanding global economic trends.

BOP = Current Account (A) - Capital and Financial Account (B) + Net Errors (C)

Uses of Balance of Payment, in particular, Balance of Trade Data

Measure of Economic Performance & Measure of Standard of Living

Measure of Economic Performance

The BOT measures an economy's global performance by assessing its export success and foreign investment attractiveness.

Measure of Standard of Living

A healthy BOT balance influences currency value, resulting in a stable exchange rate, which positively impacts price stability, employment, and economic growth, resulting in a high SOL.