MBASess5ABalofPayments09

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MBA Gl b l EBA Global Economy

Balance of Payments

Professor Augustine H H Tan MBA Global Economy1 Session 5-09


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l falance of PaymentsA record of international transactions between residents

International transactions include exchanges of goods,services or assetsResidents means businesses, individuals andgovernment agencies, including citizens temporarilyliving abroad but excluding local subsidiaries of foreigncorporations



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D bl tr ti i th BOPouble-entry accounting in the BOPAll transactions are either debit or credittransact onsCredit transactions result in receipt of payment

Merchandise exports

Transportation and travel receiptsIncome received from investments abroadGifts received from foreign residents

Local investments by overseas residents



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D bl tr tiouble-entry accounting(contd)Debit transactions lead to payments to foreigners

Merchandise importsTransportation and travel expenditures

Gifts to foreign residentsAid iven b home overnmentOverseas investments by home countryresidents

ac cre t transact on as a a anc ng e ttransaction, and vice versa, so the overall balanceof a ments is alwa s in balance



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Balance-of-Payments Accounts

Current AccountMeasures the flow of oods services income and

transfers or gifts between domestic residents,businesses, and governments and the rest of theworld.

Goods: imports and exports of tangible goods.

Services: imports and exports of services, tourism, .Income: interest and dividend payments to foreignholders of domestic financial assets.

n atera trans ers: nternat ona trans ers, orgifts, between individuals and governments.

Session 5-095 Professor Augustine H H Tan MBA Global Economy


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Balance-of-Payments Accounts .

Capital & Financial Account

domestic private residents and businesses and foreignprivate residents and businesses.

Financial assets of the domestic government

Private domestic financial assetsore gn nanc a asse s.

Tabulates two types of asset flowsInvestment flows and changes in banks and brokerscash deposits that arise from foreign transactions.



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The Official Settlements Balance

Official Settlements BalanceA balance-of-payments account that tabulatestransactions of reserve assets by official

overnment a encies.Official assets:

Gold and foreign currenciesSpecial Drawing Rights at the InternationalMonetary Fund

.



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Deficits and Surpluses in the Balance of Payments

An offsetting entry in the balance of payments ifthe sum of the credits and debits in the currentaccount, private capital account, and officialsettlements is not zero.

The sum of the credits and debits in the currentaccount, capital account, official settlements, andthe statistical discrepancy.



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Deficits and Surpluses in the Balance of Payments.

- -

The sum of the credits and debits in the currentaccount and the private capital account is

.Balance-of-Payments Surplus

A situation where the sum of the debits andcredits in the current and private capital accountis positive.

- -A situation where the sum of the debits andcredits in the current account and the private

.



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Other Deficit and Surplus Measures

Balance on Merchandise TradeThe sum of the debit and credit entries in themerchandise or goods category.

, ,The sum of the debit and credit entries thatappear in the merchandise, service, and incomecategories.

Balance on the Current Account

categories of goods, services, income, andunilateral transfers.



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Other Deficit and Surplus Measures .

Balance on the Capital & Financial AccountThe net inflow or outflow of capital (financialassets) purchased by private domestic andforei n residents.



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C rr t t

Structure of the Balance of Payments

Current accountGoods and services balance

Merchandise trade balanceServices balance

Unilateral transfers

Private transfer a ments Governmental transfers



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C it l d fi i l t

Structure of the Balance of Payments

Capital and financial accountAll purchases or sales of assets, including:

Direct investmentSecurities (debt)

Official settlements transactions



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C rr t t r l d d fi it

Current account

Current account surplus and deficitCurrent account and capital & financial account

other must be in deficitCurrent account surplus means exports of goodsan serv ces, nvestment ncome an trans ersexceed imports and outflows: net lending abroad(capital outflow)Current account deficit means imports of goodsand services, and outflows are greater thanex orts and inflows must be financed bborrowing (capital account inflows)



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The Current Account

-Y = GNP C = Consumption G = Government

Expenditure

CA = X - M > 0, Surplus [Lending Abroad]

< 0, Deficit [Borrowing From Abroad]

= - + +

S = I + CA CA = S - I > 0 Lendin Abroad

Professor Augustine H H Tan MBA Global Economy15< 0 [Borrowing From Abroad]

Session 5-09


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Current Account: Government Taxes & Expenditure

S = Y - C - G = [Y - T - C] + [T - G]

S = PS + GS PS=Private SavingGS=Government Saving

S = I + CA = PS + GS

= - + -

- -



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, ($ bill.)

Professor Augustine H H Tan MBA GlobalEconomy17 Session 5-09


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US Balance of Pa ments 2003 ($ bill.)Current account (contd)

Income receipts & paymentsinvestment income, net 21.9 - .

All income, net 16.6

Unilateral transfers, netUS Government grants -21.8US Government pensions -5.3Private remittances -41.1All unilateral transfers -68.2

Balance on current account $-541.8



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, ($ bill.)

Ca ital & financial account

Capital account transactions, net -3.1Financial account transactions, net 579.0Statistical discrepancy -34.1Balance on capital &



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Balance of Payments

a ance o ayments -

Professor Augustine H H Tan MBA Global Economy20


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T d b l & h

Balance of Payments

Trade balances & growth, 1992-7



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d f bl

Balance of Payments

Current account deficit a problem?Current account deficit has little to do with foreigntra e pract ces or compet t venessDetermined mostly by domestic macro-economic

and increase imports (paid for with borrowing)

Whether a current account deficit is good or baddepends on whether the borrowed funds are usedto pay for consumption or investment



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Singapores Current Account

SINGAPORE 1993

CA = $8,358 millionI Gross Ca ital Formation = $35 441 million

G-T = -$5,531 million [Government]- ,-$7,723 million

Gross National Savings [GNS] = $43,799

PS = GNS - [G-T] = $36,076 million

Economic Survey of Singapore 1994, Table A1.8



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SINGAPORE: BALANCE OF PAYMENTS 1993Million $

ra e a ance - ,

Balance of Services 17,458Goods & Services 9,387

,Capital [net] 8,904

Non- Monetary 4,512 ,Basic Balance 11,204Balancing Item -5,108

,Official Reserves [net] -12,154

Economic Survey of Singapore 1994



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l f l d b d

Balance of Payments

Balance of international indebtednessSummarizes one nations overall quantity ofassets an a t es aga nst t e rest o t e worShows whether the nation is a net debtor or a net

Indicates sensitive items, such as short term debt

held by foreigners which could be liquidatedquickly, straining finances


MBASess5ABalofPayments09

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