CH 3: The Balance of Payments

The Balance of Payments

The statistical record of a countrys international transactions over a period of time

A countrys balance of payments is composed of

The current account

The capital account

The financial account

The official reserves account

Statistical Discrepancy

The Current Account

includes the export and import of goods and services.

Includes unilateral transfers of foreign aid.

If debit exceeds credit, then the country is running a trade deficit.

If the credits exceed debits, then the country is running a surplus

The Financial Account (3 categories)

1. FDI - occurs when the investor acquires a measure of control of the foreign business

2. Portfolio investments - sales and purchases of foreign financial assets that do not involve a transfer of control

3. Other investments - transactions in currency, bank deposists, and trade credits.

The Official Reserves Account

Assets include Gold, Foreign currency, Special Drawing rights (SDR), and reserve positions in the IMF

Mercantilism

Holds that a country should avoid trade deficits at all costs, even imposing import restrictions.

when goods, services, or assets are provided without a corresponding return of something of economic value, the corresponding entry is made as a

transfer

Capital transfers

unlike current transfers involve change of ownership, acquisition or disposal of an asset. Includes nonfinancial assets.

Sovereign wealth funds

government-controlled, play a positive role in stabilizing the global banking system, help the balance of payment situations of the host countries.

After 1945, international reserve assets included

1. Gold

2. Foreign Exchange

3. Special Drawing Rights

4. Reserve positions in the IMF

The Balance of Payments Identity

BOPI indicates a country is able to run a BOP surplus or deficit by increasing or decreasing its reserves.

A current account surplus or deficit must be matched by a

financial account deficit or surplus, and vice-versa