Balance of payments

balance of payments

• a record of all the financial transactions that occur between the residents of country and the residents of the rest of the world

• components of the BoP

  • current account

  • capital account

  • financial account

• credit (+): money flowing into an account

• debit (-): money flowing out of an account

• if more money flows out than in —> deficit

• if more money flows in than out —> surplus

the current account

• measure of the net flow of funds from trade in goods/services, income and transfers

• 4 components:

  • balance of trade in goods

    • exports - imports (X-M)

  • balance of trade in services

    • exports - imports (X-M)

  • income

    • WRIP received - WRIP paid

    • income inflows - outflows

  • current transfers

    • payments at gov level between countries

    • payments with no goods received

    • current inflows - outflows

the capital account

• the inflows minus outflows of funds for capital transfers and transactions in non-produced non-financial assets

• 2 sections:

  • capital transfers

    • net monetary movements of capital goods used in the production process

    • e.g debt forgiveness

  • transactions in non-produced, non-financial assets

    • exchange of money in non-produced assets

    • e.g natural resource like minerals

    • e.g intangible assets like copyrights

the financial account

• inflows minus outflows of funds for FDI, portfolio investment, reserve assets and official borrowing

• 4 components

  • FDI

    • inflows and outflows of long-term investments in physical capital e.g foreign ownership of domestic assets

  • portfolio investment

    • investment in financial capital like stocks buying and selling of stocks

  • reserve assets

    • foreign currency reserves that the Central Bank can buy or sell to influence the value of the country’s currency

  • official borrowing

    • government borrowing from abroad

interdependence between 3 accounts

• current account should balance with capital and financial account and be equal to zero

• if there is current account deficit, there must be surplus in capital and financial account

  • excess spending on imports from current account must be financed by money flowing into country from sale of assets (financial account)

• if there is current account surplus, must be deficit in capital and financial account

  • excess income from exports is financing the purchase of assets in other countries (financial account)