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ECONOMICS 11TOPIC 12

OPEN ECONOMY MACROECONOMICS

U-PRIMO E. RODRIGUEZDept. of Econ., UPLB

Meaning of “Open Economy”

Most modern economies do

not operate in isolation.

Countries rely in varying

degrees on trade with other

countries on goods and

services for their

consumption and production

needs.

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The transactions among countries extend to transfer payments, sales and purchases of assets, borrowing and lending, etc.

A country that engages in such transactions is called an open economy

Balance of PaymentsBalance of Payments (BOP) - a summary of the transactions between residents and non-residents of a country over a given period

It records transactions in goods, services, assets and transfers. Keeps track of the country's transactions with the rest of the world. The information helps in analyses that could assist in the formulation of economic policies and decisions.

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Item Values Sub-totals

Current Account (CA) 7,177

Goods & services

Exports 69,721

Imports -80,845

Income (net) -871

Transfers (net) 19,172

Capital Account (KA, net) 181

Financial Account (FA) 5,520

Direct Investment (net) 341

Portfolio Investment (net) 3,523

Others (net) 1,656

Net unclassified items (NUC) -3,642

Overall BOP Position (CA + KA + FA + NUC) 9,236

Reserves and Related Assets (RRA) -9,236

BOP Acct of the Phil, 2012 (preliminary, million USD)

Source: Bangko Sentral ng Pilipinas, www.bsp.gov.ph

Current AccountThe Current Account

reflects the flow of the country's transactions in goods and services, investments as well as current transfer payments.

Inflows = earnings of residents from non-residents

Outflows = payments of residents to non-residents

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Capital Account

Capital Account

the sum of the Capital Account and Financial

Account

represents capital transfers, changes in the

resident claims on non-residents (changes in

assets), and changes in non-resident claims on

residents (changes in liabilities).

Financial AccountThe Financial Account captures transactions in equity and other financial assets. It is classified into

Direct Investment represents transactions in equity capital, reinvested earnings, etc. Portfolio Investment represents transactions in

equity securities and debt securities (bonds and notes, money market instruments, etc.). Other Investment (net) includes trade credits,

short to long term loans, currency and other deposits

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Reserves and Related Assets

Reserves and Related Assets are composed of

Exceptional Financing, Use of Fund Credit and

Loans and Reserve Assets.

Reserve Assets represent changes in the assets of

the monetary authorities that can be used for

balance of payments purposes. It is composed of

Monetary Gold, Special Drawing Rights (SDR),

Foreign Exchange and Other claims.

Net Unclassified ItemsTheoretically, the sum of the Current Account, Capital Account, Financial Account and Reserves and Related Assets must be zero, i.e.,

CA+KA + FA + RRA = 0.

The myriad of transactions between residents and non-residents poses difficulties for recording and compiling entries. These eventually cause the sum of the to be non-zero.

To capture the presence of such a discrepancy, the practice is to present it as a separate item in the BOP accounts - Net Errors and Omissions.