2 Balance of Payment

BALANCE OF
PAYMENT
Objectives
Define Balance of Payments

To know the causes of current account deficits and surplus
Explain official reserve assets and its major components
Explain how to compute overall balance and discuss its significance
Balance of Payments
Statistical record of a
country’s international
transaction over certain
period of time.
BOP is like a giant receipt that

shows all the flows or
transaction.
Balance of Payments
Concerning the demand

and supply of a country’s
currency
- Ceteris Paribus “All things
being equal”
Balance of Payments
Balance of Payment data may
signal its potential as a business
partner for the rest of the world.
- To improve BOP, country may

impose restrictions in imports
and discourage capital outflows.
Balance of Payments
Can be used to evaluate the performance
of a country in international economic
competition.
-Trade deficit signal that country's
domestic industry lack international
. competitiveness.
Balance-of- Payment Accounting
Presented in double-entry -Credit entries give rise to
the demand for dollars.
bookkeeping.
-Debit entries give rise to the
Recorded over certain period of time.
supply of dollars.
Transaction from foreigners will be
recorded as credit (+) Every credit in the account is
Transaction that give rise to foreigners balanced by matching debit
will be recorded as debit (-) and vice versa.
Balance of Payments Account
Since the Balance-of-Payments records all types of international
transactions, it contains a wide variety of account.
3 main types of account:
1. The Current Account - includes import and export of goods and services.
2. Capital Account- includes all purchases and sales of assets such as stocks,
bond snd real estate.
3. Official Reserve Account- international reserve such as dollars, gold,
foreign exchange and SDR
1. Current Account
•The current account deficit implies that US
used up more output than it produced.
•represents a reduction in the country's net foreign wealth .
4 Categories of Current Account:

1.Merchandise Trade- represents export and
import of tangible goods.
2. Services- include payments and receipts for legal,
consulting, intellectual properties and tourist
expenditures. Sometimes called as “Invisible trade”.
3. Factor Income- payments, and receipts of interest,
and other foreign investment.
4. Unilateral Transfers- “unrequited” payment.
Regarded as act of buying goodwill from recipients.
The curve shows initial
deterioration and initial
improvement of the trade
balance following a
depreciation. Both imports
and exports tends to be
responsive to exchange rate
changes, exerting positive
influences on the trade
balance.
J- Curve Effect
CAPITAL ACCOUNT
Measures the country’s sales of asset to foreigners and the country’s purchases of
foreign asset.
The sales (exports) recorded as credit, purchases (imports) of foreign assets are
recorded as debit.
Divided into three categories

1. Direct Investment- involves acquisition of controlling interests in foreign
business
2. Portfolio investments- represents sales and purchases of foreign financial assets
such as stocks and bonds that do not involve a transfer of control
3. Other investments- includes bank deposits, currency investment and trade credit
STATISTICAL DISCREPANCIES
Recordings of payments and receipts arising from international
transactions are done at different times and places, possibly using
different methods.
There’s going to be some omissions and misrecorded transactions.

The overall balance is
significant because it indicates
a country’s international
payment gap that must be
accommodated with the
government’s official reserve
transactions
OFFICIAL RESERVE ACCOUNT
If a country must make a net payment to

foreigners because of BOP deficit, the
could either run down its official reserve
assets or borrow a new from foreigners.
Official reserve assets include gold,
foreign currencies, SDRs and reserves
positions in the IMF
THE BALANCE-OF-PAYMENTS
IDENTITY
When the balance-of-payments accounts are recorded correctly, the combined
balance of the current account, the capital account and the reserves account must
be zero
BCA + BKA + BRA = 0
BCA= balance on the current account

BKA= balance on the capital account
BRA= balance on the reserves account
THE BALANCE-OF-PAYMENTS
IDENTITY
Under a fixed rate regime: Pure flexible exchange rate
regime
BCA + BKA + = -BRA
BCA= -BCA
-applied by a government or central
bank that ties the country’s official
currency exchange rate to another
country’s currency
BALANCE OF PAYMENT OF MAJOR COUNTRIES.
The balance of payments tracks all economic transactions between a
country and the rest of the world over a given period. It consists of the
current account, capital account, and financial account. Analyzing the
balance of payments trends allows us to understand a country's
economic performance and its relationship with other nations.
The Balance of Payments is a measure of the difference between a
country's financial transactions with the rest of the world, including
exports, imports, and capital flows.
4. Natural Language Processing

How One Word Haunts Dollar
"How One Word Haunts Dollar" is a phrase commonly used to describe the impact of the
US dollar's dominance in the global financial system.
It refers to the influence of central bank policies and monetary decisions on the value
and stability of a country's currency. Central banks often make strategic decisions
regarding interest rates, money supply, and foreign exchange intervention, which can
impact currency values.
In every country, the US dollar plays a crucial role in various aspects of their economy.
Firstly, many countries use the US dollar as a medium of exchange for international
trade. This means that countries need to hold a significant amount of dollar reserves to
facilitate imports and exports. As a result, fluctuations in the value of the US dollar can
directly impact the costs of goods and services in those countries.
5. Summary and Conclusion

The Dollar and Deficit
DOLLAR
The Dollar refers to the US dollar, which acts as the primary medium of exchange and unit of account in
the United States. It is also widely accepted and used internationally. The US dollar's value can fluctuate
depending on various economic factors, including interest rates, inflation, and market demand.
DEFICIT
It refers to a gap between a country's spending and its revenues. Specifically, the US budget deficit
represents the amount by which the federal government's spending exceeds its income in a given period.
Whenever the US government spends more than it receives in taxes and other revenues, a budget deficit
is created.
RELATIONSHIP
The relationship between the Dollar and the Deficit becomes significant when the government relies on
borrowing to finance the deficit.
Thank you for
listening!

2 Balance of Payment

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2 Balance of Payment

Uploaded by

Copyright:

Available Formats

BALANCE OF

Define Balance of Payments

BOP is like a giant receipt that

Concerning the demand

- To improve BOP, country may

4 Categories of Current Account:

Divided into three categories

There’s going to be some omissions and misrecorded transactions.

If a country must make a net payment to

BCA= balance on the current account

4. Natural Language Processing

5. Summary and Conclusion

You might also like