Lecture Review Of Balance Of Payment & Macroeconomic Accounting PDF

Lec 7, 8 A2 - 1  The BALANCE OF PAYMENT (BOP) 1-Definition & Categories Definition Is an accounting statement (T account) that summarizes all the intern’l econ. transactions b/w residents of a home country and residents of all other countries. Currency inflow are recor...

Lec 7, 8 A2 - 1  The BALANCE OF PAYMENT (BOP) 1-Definition & Categories Definition Is an accounting statement (T account) that summarizes all the intern’l econ. transactions b/w residents of a home country and residents of all other countries. Currency inflow are recorded as credits (receipts) with (+) sign. Currency outflow are recorded as debits (payments) with(-) sign. A2 - 2  The BALANCE OF PAYMENT (BOP)- Cont’d BOP Categories. I- Current account : Records flows of goods, services, and transfers II- Capital account : Records flows of public and private investment and lending activities. III- Official reserve account : measures changes in holdings of gold and foreign currencies A2 - 3  I- Current account Main Items Credit Debit 1-Trade Account EX Goods IM goods 2-Trade in Services EX Services IM services Ex. Tourism, transportation, traveling,.. etc 3- Investment income. Receipts Payments Ex. Return on deposits ,securities and FDI 4- Unilateral Transfers (official) Foreign aids Nat’l aids (private) nat’l remittance foreign remittance from abroad to abroad A2 - 4  II- Capital account Main Items: Credit Debit 5- Private investments FDI NDI FI in Portfolio NI in Portfolio 6- Official lending Borrowing Lending 7- Debit Repayments Receipts Payments A2 - 5  III- Official reserve account Main Items Credit (+) Debit (-) 8- Official reserve account : Changes in the foreign reserve holdings by the Decrease Increase monetary institutions. 9- Statistical discrepancy XXX XXX ( Error & Omission) Overall BOP (in accounting sense) Current A/C + Capital A/C +Official Reserve A/C = BOP = 0 BOP (in economic sense) Items: all excluding item # 8 surplus credit > debit or deficit credit < debit A2 - 6  2-The Macroeconomic Accounting Identities 1- Nat’l Account Equilibrium Nat’l Income = Consumption (C) + Savings (S) ….(1) Nat’l Spending = Consumption (C) + Investment (I)..(2) Nat’l Income – Nat’l Spending = S - I …………….(3) 2- The link b/w Current & Capital Accounts d. Nat’l Income – Domestic Spending = Export …….(4) e. Nat’l Spending - Domestic Spending = Import …….. (5) f. Nat’l Income - Nat’l Spending = Export – Import …. (6) g. S - I = X - M (Net Foreign Investment) ….(7) Conclusions : When S > I then X > M means Current A/C surplus = Deficit in the Capital A/C and / or Official Reserve A/C A2 - 7  2-The Macroeconomic Accounting Identities (Cont’d) 3- Gov’t. Budget (Spending – Taxes) & Current A/C a- Nat’l Income = Private (C) + Priv. S + Taxes ……1 b- Nat’l Spending = Priv. (C) + Priv. I + Gov’t. Spending …2 c- Nat’l Income - Nat’l Spending = Priv. S – Priv. I + Gov’t. Savings ………………3 D- Current A/C (X – M) = Priv. S Gap +Gov’t. Savings …4 A2 - 8 3- Coping With The Current A/C Deficit A country with a current a/c deficit suggests: 1. Currency Devaluation 2. Protectionism 1. Currency Devaluation: A current a/c deficit (X