Balance of Payments

Balance of Payment

  a record of all financial transactions between one country and the rest of the world over a set period

Inflow of money

credit items (exports are counted as positive entries)

Outflow of money

debit items (imports are counted as negative entries)

Current account

the net flow of money from goods and services, and income and transfers

Trade balance X – M

The value of the difference between imports and exports

Primary Income Balance

money that is earned less what is paid to the rest of the world

Examples of primary income balance

interest on loans, dividends & wages

Secondary income balance

money sent between countries where nothing is traded in return (it is a transfer)

examples of secondary income

foreign aid, pension, gifts and donations

Capital And Financial Account

the net change in ownership of assets and liabilities

Capital transfers

transfer of ownership without receiving anything in return

Examples of capital transfers

debt forgiveness, transfer of assets between residents and non residents

Direct investments

are long term capital investment in a business where the inverstor has more than or equal to 10% voting power through ordinary shares/voting stock

examples of direct investments

purchasing machinery, buildings and factories or purchasing stock/shares

Portfolio investment

purchase of equity (shares or bonds) in a business, where the investor doesn’t have influence in business operations

examples of Portfolio investments

shares or bonds

Reserve assets

purchase or sale of reserve assets (foreign currencies or gold ) helped by the RBA

examples of reserves assets

foreign currencies and gold

Other investment

transactions that don’t fit into one of the other categories

exmaple of other investment

trade credit

Financial derivatives

purchase or sale of financial derivatives, it involves the exchange of risk between parties rather than funds

examples of financial derivatives

futures contracts and options

current and financial account

the net change in ownership of assets and liabilities