c



m It is a statement of a country, which
depicts the transaction of that country
with rest of the world during a specified
period of time..
m A record of the value of all transactions
between residents of a country with
outsiders..
A. THE BALANCE OF PAYMENTS
(B
(B--O-P)
1. PURPOSE:
Measures all financial and
economic transactions over
a specified period of time.
r. Double
Double--entry bookkeeping
a. Currency inflows = credits
earn foreign exchange
b. Currency outflows = debits
expend foreign exchange
ð. Three Major Accounts:
a. Current
b. Capital
c. Official Reserves
.
‘
‘ 

The balance of current account tracks

the value of a country·s:
u Exports and imports of goods and
services
u Income on investments abroad
u Unilateral transfer payments (private
and government)
 
‘‘ ‘‘ ‘ 

The balance of capital account tracks

the value of a country·s transactions
that relate to the buying and selling of
real and financial assets:
u árivate and government assets abroad
u árivate and government assets in
India
u Stocks, Bonds, loans, real estate, etc
Capital Account
a. Function: records public
and private investment and
lending.
b. Inflows = credits
c. Outflows = debits
Capital Account (conƞt)
d. Transactions classified as
1.) portfolio
r.) direct
ð.) short term
c. Official reserve account:
Balances the imbalance between the current
and capital accounts
Includes:
u Foreign currencies, Gold
u Special drawing rights (of the Int. monetary
fund)
u The reserve position in the Int. monetary fund
u Financial assets held by official agencies
Official Reserves Account
a. Function:
1.) measures changes in
international reserves
owned by central banks.
r.) reflects surplus/deficit of
a.) current account
b.) capital account
^. Net Effects:
a. Sum of all transactions
must be zero:

1.) current account

r.) capital account
ð.) official reserves
º. THE BALANCE OF PAYMENTS IS,
THEREFORE, THE SUM OF THE
CURRENT AND CAPITAL ACCOUNT
BALANCES.
u ÷ssuming no interventions by central banks
(using the official reserve account), the
current account should be balanced against
the combined-
combined-capital and financial accounts:
÷ deficit in the current account is always
accompanied by an equal surplus in the
capital or financial accounts
m èhen the current account and capital
account are not balanced despite
intervention by the central banks (using
the official reserve account) there are
errors and emissions (capital flight)
 — c



Note:
*Services include travel and tourism, trade
transportation, insurance, education, financial,
technical, telecommunications and other
business and professional services.

In addition there are royalties, payments for

capital services besides interest, such as
dividends, payments for foreign labor, etc.
 c



ÿ . What kinds of transactions represent
the basic focus of balance of payments
accounting?

A. All transactions between the citizens of a

nation and those of other nations are
recorded in the balance of payments for a
given period of time.
 ë 



ÿr. How is information recorded in balance of

payments accounting?

A.
m The basic technique is standard, double-
double-entry
accounting,

m a flow of funds statement that shows changes in

assets, liabilities and net worth over time.
ë
 

  


m The balance of payments statement is

to inform government authorities of the
international position of the country to
assist them with monetary-
monetary-fiscal questions
as well as trade and payments policies.
  



ÿð. What is the meaning of a debit in a

balance of payments account? What is a
credit?
A.
m A debit records a transaction increasing
assets or reducing liabilities.
  



m A debit results from some kind of

transaction requiring an immediate out-
out-
payment.
m A debit arises from the purchase of goods,
claims, or reserve assets and represents
an inflow of value.
  



m A credit records a transaction reducing

assets or increasing liabilities.
m It results from some kind of transaction
requiring an immediate in-
in-payment.
m A credit arises from the sale of goods,
claims, or reserve assets and represents
an outflow of value.
 — 
ÿ^. How does a country derive foreign
currencies it needs to conduct its
international business?
A. The sources of funds, the supply of
foreign exchange,
exchange, are
m exports,

m investment income,
 — 
m The sources of funds, the supply of
foreign exchange,
exchange, are

m transfer payments received,

m and long-
long-term and short
short--term borrowing.
 — 

m Creditentries reflect the sources,

debit entries indicate the uses of
foreign exchange.
 ` 

—
 
ÿº. What is an overall balance of payments
surplus? What is an overall deficit?

m A surplus is when the sum of the current

account plus the private capital account is
counterbalanced by an accumulation of
official net assets, so official reserve
assets increase.
 ` 

—
 
m What is an overall balance of payments
surplus? What is an overall deficit?

m If it is in deficit , the sum is

counterbalanced by an accumulation of
official net liabilities, so the country sees
its official reserve assets decline.