BOP

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BOP

• Lerzan Özkale

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BALANCE OF PAYMENTS(BOP)

• The record of a countrys transactions in goods,
  services and assets with the rest of the world is
  its balance of payments.
• The BOP is also the record of a countrys sources
  (supply) and uses (demand) of foreign exchange.
• The distinction between the balance of payments
  and a balance sheet
• A balance sheet for a firm measures its stock of
  assets and liabilities at a moment in time.
• The balance of payments, by contrast, measures
  flows, usually over a period of a month, a
  quarter, or a year.

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BOP

• BOP records economic transactions between the
  residents and government of a particular country
  and the residents and governments of the rest of
  the world.
• Concept of Residency
• In BOP accounting, an individual may be a
  resident of one country and a citizen of another
  (roughly after 18 months).
• A firm may be resident in a country other than
  the country in which its headquarters is located.
• This means that their transactions with other
  residents of the countries in which they reside
  ordinarily do not have BOP effects.
• Even for their payments in the money of their
  own country, they are considered as foreign
  resident because their holdings of their home
  countrys currency are considered foreign-held by
  their home country.
• But government employees residing in a foreign
  country are not considered resident of this
  country.

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BOP

• Transaction Concept
• Most BOP transactions involve current or future
  money flows, but there are some exceptions
• Barter trade
• Shipment of equipment to foreign subsidiaries by
  the corporations for increasing their investments
  abroad no payment. The merchandise trade is
  affected without offsetting flow of money.
• Unilateral transfers
• government grants, pension payments etc.
• Profits of a subsidiary which the parent company
  allows the subsidiary to retain. The profits are
  not remitted to the parent so no actual
  transaction occurs. But, it is general practice
  to present reinvested earnings of subsidiaries in
  the BOP as if they were remitted to the parents
  and returned to the subsidiaries.

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BOP

• Statistical Disrepancy Account
• Time lags
• Changes in recording procedures
• Random variations in unrecorded transactions
• Underground Economy Hypothesis
• Over or under statement of the current account
  deficit
• problems of under or overinvoicing in foreign
  trade
• Under statement of the exports and investment
  income
• Understatement of net capital inflows / outflows
• The role of exchange rates (ER differences in
  time)

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Estimated Size of the Underground (hidden)
Economy ( of GNP)

• Poland 34 Denmark 16 Netherlands 8
• Hungary 31 Finland 11 Australia 7
• Spain 21 Germany 11 France 6
• Greece 20 USA 10 Norway 5
• Italy 16 UK 10 Japan 3

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BOP

• CURRENT ACCOUNT
• Trade in goods
• Exports (credit () item on the current
  account) FOB
• Imports (debit (-) item on the current account)
  CIF
• Trade in services (freight, insurance etc)
• BALANCE OF TRADE
• Investment income (dividends, interest, rent,
  profits from Foreign assets holdings like
  stocks, bonds or from real assets building,
  factories)
• Investment payments
• Net transfer payments and other ( a check to a
  parent abroad, a check by the government to a
  retiree living in another country interest paid
  by the government to foreigners)
• BALANCE ON CURRENT ACCOUNT

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BOP

• CAPITAL ACCOUNT
• For each transaction recorded in the current
  account, there is an offsetting transaction
  recorded in the capital account.
• Ex A US citizen purchasing a Japanese car
• Yen/Dollar ER 125 yen/dollar
• Price of the car 2.5 million yen 20.000
• The US citizen takes 20.000, buys 2.5 million
  yen and buys the car.
• BOP Imports increased by 20.000 in the
  current account
• Foreign assets in the US (Japanese holdings of
  US ) are increased by 20.000 in the capital
  account.
• The net wealth position of the US vis-a vis the
  rest of the world has decreased by 20.000.

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BOP

• An increase in the US imports results in an
  increase in foreign assets in the US.
• The US must pay for the imports and whatever it
  pays with (in this example, in US dollars), is an
  increase in foreign assets in the US.
• Conversely, an increase in US exports results in
  an increase in US assets abroad, because
  foreigners must pay for the US exports.

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US BOP of 1997All transactions bringing forex
into US are credited () to the CAAll
transactions causing US to lose forex are debited
(-) to the CA

• CURRENT ACCOUNT billions of US
• Goods exports 682.3
• Goods imports -888.5
• (1) Net export of goods -206.2
• Export of services 257.6
• Import of services -170
• (2) Net export of services 87.6
• Income received on investments 242.4
• Income payments on investments -255.7
• (3) Net investment income -13.3
• (4) Net transfer payments and other -36.8
• (5) Balance on current account (1234) -168.7

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US BOP ( contd)

• CAPITAL ACCOUNT
• (6) Change in private US assets abroad (increase
  is -) -405.3
• (7) Change in foreign private assets in US
  588.2
• (8) Change in US gov. assets abroad (increase is
  -) -1.0
• (9) Change in foreign gov. assets in the US
  90
• (10) Balance on capital account (6789)
  271.9
• (11) Statistical disrepancy -103.2
• (12) Balance of Payments (51011) 0

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National Saving, Investment, and the Current
Account

• National income accounting identity is
• Y C I G X
• WHERE
• Y national income or GDP (Gross Domestic
  Product)
• C consumption
• G government expenditures (spending)
• X net exports (exports minus imports sometimes
  also referred as X - M)

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National Saving, Investment, and the Current
Account

• Y - C - G S I X
• WHERE
• S national saving
• This equation indicates that national saving is
  equal to the sum of investment spending plus the
  current account (CA) (net exports),
• which implies that the CA must be equal to the
  national saving (S) minus investment spending
  (I)
• X S - I

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National Saving, Investment, and the Current
Account

• X S - I
• If domestic saving S gt I
• ?CA surplus (positive X)
• If domestic saving S lt I
• ?CA deficit (negative X)

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National Saving, Investment, and the Current
Account

• A country where spending is greater than income
  has investment greater than saving, and a current
  account deficit.
• The excess of spending over income must be
  financed by foreign investment,
• so there will be a capital account surplus to
  match the current account deficit.

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National Saving, Investment, and the Current
Account

• The BOP values are affected by changes in
  international spending and saving behaviour.
• This behaviour may be
• on the part of households and business firms
• (private sector)
• or on the part of government
• (public sector)

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National Saving, Investment, and the Current
Account

• There are two kinds of saving
• private Y - T - C
• T Taxes
• government T - G
• National saving is equal to private saving plus
  government saving.
• S (Y - T - C) (T - G)

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National Saving, Investment, and the Current
Account

• S (Y - T - C) (T - G)
• /- /-
• For many years, for the US
• the first one was ,
• the second one was -
• Government saving is the negative of government
  budget deficit.

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National Saving, Investment, and the Current
Account

• A government spending more than its tax revenue
  creates government dissaving and contribute to a
  larger CA deficit.
• The CA deficit and Capital Account surplus could
  be reduced by reducing the government budget
  deficit so that government dissaving falls.
• National income, spending and national saving are
  closely related with BOP.

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National Saving, Investment, and the Current
Account

• Reducing the current account deficit requires
• increasing domestic saving relative to investment
• and
• increasing domestic output relative to domestic
  spending.

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