Chapter 3 Balance of Payments PDF

the statistical record of a country's international transaction...

the statistical record of a country's international transactions over a certain period BALANCE OF PAYMENTS of time presented in the form of double-entry bookkeeping Balance of Payments Accounting provides detailed information concerning the demand & supply of a country's currency may signal a country's potential as a business REASONS TO STUDY partner for the rest of the world continuous deficits on the current accounts since 1982 used to evaluate the performance of the country in international economic competition continuous surpluses on the financial account US (exception of 1991) magnitude of US current account deficits is far represents exports & imports of tangible goods greater than any ohter countries experienced GOODS TRADE over 1982-2020 example: oil, wheat, clothes, computers, automobiles... continuous current account deficits coupled with financial account surpluses include payments & receipts for legal, UK consulting, financial, engineering & other SERVICES magnitude is far less than that of the US services; royalties for patents & intellectual properties; shipping fees & tourist expenditures traditionally had current account surpluses consists largely of payments & receipts of overall, the US & the UK generally use up more PRIMARY INCOME interest, dividends & other income on foreign outputs than they produce, whereas the current account deficits between 1991-2001 investments that were previously made opposite holds for China, Japan & Germany due to German reunification & the resultant need to absorb more output domestically to GERMANY BOP Trends in Major Countries rebuilt the East German region CURRENT ACCOUNT involves "unrequited" (= nonreciprocal) payments called current transfers SECONDARY INCOME since 2002 returned to its earlier pattern example: foreign aid, remittances... unbroken string of current account surpluses since 1982 tends to increase exports & decrease imports CURRENCY DEPRECIATION financial accounts deficits in most years JAPAN can improve (worsen) the trade balance immediately if imports & exports are responsive current account balance, especially the trade (inelastic) balance, tends to be sensitive to exchange rate a major creditor nation changes tends to have surplus on the current account as Chapter 3: Balance refers to the intial deterioration & eventual well as the financial account (until recently) CHINA of Payments J-CURVE EFFECT improvement of trade balance following the depreciation of a country's currency China's official reserves have increased sharply covers one-time capital transfers & nonproduced, nonfinancial asset transactions between residents & foreigners balance on current account BCA example: assets like land, mineral rights, balance on capital account BKA airspace, brand names & licenses balance on financial account BFA involves ownership changes or asset transfers, typically large & infrequent balance on the reserves account BRA The balance of Payments Identity CAPITAL ACCOUNT (BOPI) often small & merged with the financial account = BCA + BKA What if a US company sells a brand name to a fixed exchange regime requires reserves to foreign company? Credit or debit? Inflows or manage BOP imbalances outflows of USD? BOPI reserves act as a buffer for deficits or capital => credit entry in the US capital account QUESTION outflows because it's a sale in a flexible exchange regime, BOP balances => inflows of USD because the foreign without the need for reserves company would pay the US company measures the balance of US asset sales to foreigners & US purchases of foreign assets asset sales (credits) lead to capital inflow but create future liabilities for US companies asset purchases (debits) result in capital outflow but generate future payments from foreigners FINANCIAL ACCOUNT What if a Japanese investment bank buys US Balance of Payments Accounts company stocks? Credit or Debit? Inflows or outflows of USD? What are the future liabilities of the US companies? => credit because sale of assets to a foreign entity QUESTION => inflows of USD => the U.S. companies will owe dividends or returns on the stocks to the Japanese investment bank, creating future financial outflows as payments to foreign investors. arises from differences in recording payments & receipts from international transactions caused by differences in timing, location or STATISTICAL DISCREPANCY recording methods recordings are inherently imperfect. the cumulative balance of payments including the current account, capital account, financial account & the statistical discrepancies balance > 0 OVERALL BALANCE IF SURPLUS the Central Bank can sell USD to increase its official reserves (in foreign currencies) balance < 0 IF GAP the Central Bank has to buy USD by decreasing its official reserves (in foreign currencies) includes transactions undertaken by the Federal Reserve in the US to finance the overall balance & intervene in the foreign exchange market gold foreign exchange (= holding of foreign currencies) INTERNATIONAL RESERVE ASSETS special drawing rights (SDRs) OFFICIAL RESERVE ACCOUNT reserve positions in the IMF (mainly forex) credit WHEN NUMBER > 0 the Fed has to decrease its official reserves to support the dollar (= K inflow) debit WHEN NUMBER < 0 the Fed can increase its official reserves by selling the "excess" dollar inflow (= K outflow)