Balance of Payment Overview

Study Notes

BOP is an accounting statement summarizing international economic transactions between a home country and other countries.
Inflows are recorded as credits (receipts) with a positive sign.
Outflows are recorded as debits (payments) with a negative sign.

Current Account: Records flows of goods, services, and transfers.
- Trade Account: Exports (goods/services) - Imports (goods/services)
- Investment Income: Return on investments (e.g., deposits, securities, FDI).
- Unilateral Transfers: Foreign aid/remittances (official/private).
Capital Account: Records flows from public and private investment and lending.
- Private Investments: FDI (foreign direct investment), Portfolio investment (FI)
- Official lending
- Debit Repayments
Official Reserve Account: Measures changes in holdings of gold and foreign currencies.
- Decrease
- Increase

National Income = Consumption + Savings
National Spending = Consumption + Investment
National Income – National Spending = Savings – Investment
National Income – Domestic Spending = Exports
National Spending – Domestic Spending = Imports
National Income – National Spending = Exports – Imports
Savings - Investment = Net Foreign Investment (X - M)
- When Savings > Investment (S > I), X > M, meaning Current Account Surplus.
- Conversely (S < I), X < M, meaning current account deficit

Currency Devaluation: If a country's current account deficit (X < M), devaluing its currency will make its exports cheaper and imports more expensive, potentially correcting the deficit.
Protectionism: Governments may impose tariffs or quotas to reduce imports, but this action might provoke retaliation from other countries.

Inflation: Increased inflation in a country typically leads to a decrease in its current account balance as imports increase and exports decrease due to pricing competitiveness.
National Income: Increased national income usually leads to a decrease in the current account because imports rise as purchasing power (income) is increased
Government Restrictions: Tariffs and quotas imposed by a country can reduce imports, but other countries may retaliate with similar measures.
Exchange Rates: A rising value of a currency typically reduces a country's current account balance as imports increase and exports decrease. The interplay of these factors leads to a complex balance-of-trade scenario.

Changes in Restrictions: Removal of government barriers creates new investment opportunities.
Privatization: Selling off government operations can boost foreign direct investment.
Potential Economic Growth: Countries with high economic growth potential attract more foreign investment.
Tax Rates: Lower corporate tax rates encourage foreign investment
Exchange Rates: The expectation of a strengthening local currency can attract foreign direct investment.

Tax Rates on Interest or Dividends: Investors prioritize countries with lower tax rates on interest and dividends.
Interest Rates: Higher interest rates attract capital flows.
Exchange Rates: Foreign investors are attracted by the possibility of currency appreciation.

International Monetary Fund (IMF): Promotes international monetary cooperation, exchange stability, economic growth, and provides temporary financial assistance during imbalances of payments.
World Bank Group: Fosters economic development, primarily by assisting the poorest countries and people.
World Trade Organization (WTO): Deals with the global rules of trade between nations to ensure smoother, more predictable, and freer trade flows. Its functions include administering trade agreements, serving as a forum for trade negotiations, handling trade disputes, monitoring national trading policies, providing technical assistance for developing countries, and cooperating with other international bodies.
Regional development Agencies: Focus on regional economic development (e.g., Inter-American Development Bank, Asian Development Bank).