Balance of Payments BOP Accounting

1
Balance of Payments (BOP) Accounting

• BOP accounting is the recording of transactions
  between domestic and foreign economic agents.
• Any transaction that results in a receipt of
  money by domestic agents from abroad is recorded
  as a credit in the BOP accounts.
• Any transaction that entails the payment of money
  by domestic units to foreigners is recorded as a
  debit in the BOP accounts.
• The current account records foreign transactions
  involving merchandise and services.
• The capital account records foreign transactions
  involving financial assets and land.

2
(No Transcript)
3
(No Transcript)
4
(No Transcript)
5
International Trade The U.S. Trade Balance
billions of dollars
6
(No Transcript)
7
(No Transcript)
8
Current Account balance of selected
industrialized nations, August 1998 to August 1999
Source The Economist
9
Exchange Rates
An exchange rate is the price of one national
currency expressed in terms of another national
currency. For example, the dollar price of the
British pound is 1.71-- meaning it takes 1.71
to buy 1 pound
10

• Why do agents want to swap marks for dollars?
• To buy American-made goods.
• To hold stocks in U.S. companies or other
  dollar-denominated assets.
• To speculate on future exchange rate movements

Exchange rates are determined by the supply and
demand of foreign exchange
S
DM per
1.82
1.69
In this case, the mark depreciates against the
dollar
D
D
s
0
11
Source Wall Street Journal
Currency Cross Rates New York Trading,July 9, 1999
12
Firms and individuals demand marks to buy
German- made goods, to hold mark-denominated finan
cial assets, or to profit from what they hope
will be an increase in the international value of
the mark.
?Dollar appreciates against the mark
S
per DM
S
.59
.55
D
DMs
13
Exchange rates and the price of imported goods
Let the dollar price of the mark 0.59--i.e.,
it costs 59 cents to purchase 1 mark in the
market for foreign exchange. Let the mark price
of a Krups espresso maker 100 marks Question
What is the dollar price of the Krups espresso
maker?
price (.59)(100) 59.00
14
Effect of an appreciating dollar on the price of
imported goods
What if the dollar should appreciate, or gain
value, against the mark? Let the dollar price of
the mark decrease to 0.55 . Question What is
the dollar price of the Krups espresso maker?
price (.55)(100) 55.00
15
Exports and the price of exported goods and
services
Let the mark price of the dollar 1.69
marks--i.e., its cost 1.69 marks to buy a dollar
in the foreign exchange market. Let the dollar
price of the Microsoft Windows 98
189.00 Question What is the mark price of
Windows 98?
Mark price (1.69)(189.00) 319.41 marks
16
Effect of a depreciating mark on the price of
Windows 98
Let the mark price of the dollar increase to 1.82
marks. Question What is the mark price of
Windows 98?
Mark price (1.82)(189.00) 343.98 marks
17
Should we be concerned about the trade deficit?
Like a federal deficit, a trade deficit must
be financed. If international borrowing is ruled
out,then a a deficit might crowd out private
borrowing and investment
The following holds for an open economy without
external (foreign) borrowing Sp I Government
Deficit Trade Deficit
18
Downside of trade deficits
?Allowing for external (foreign) borrowing, the
following is true by definition SP foreign
borrowing ? I government deficit trade deficit
External borrowing can impact domestic interest ra
tes, and leave the nation vulnerable to capital
flight.It can also comprise political autonomy