Hind El Atmani 亨德

Balance of payments
• Balance of payment is a statistical statement designed to
provide, for a specific period of time, a systematic record
of an economy’s transactions with the rest of the world. Its
major components are the current account and the
financial account. The spending of foreign currency is
debit and it is a negative item. If a transaction earns
foreign exchange for the nation, it is recorded as a plus
item and it is a credit. Generally speaking, imports are
debits and exports are credit. If credits are more, i.e.
exports are more, than it is a positive sign for the
economy and it is known as a favorable balance of
payment. If debits are more, i.e. imports are more, than it
is a negative sign for the economy and it is known as an
unfavorable balance of
Importance of BoP

The BoP is an important indicator of pressure on a

country’s foreign exchange rate .
The BOP helps to forecast a country’s market potential,
especially in the short run.
Changes in a country’s BOP may signal the imposition or
removal of controls over payment of dividends and
interest, license fees, royalty fees, or other cash
disbursements to foreign firms or investors.
Contents of BOP

Current account
Capital account
Financial account
 Net errors and omissions account
 Reserves and related items: official reserve account
The Accounts of the BOP

※ The classification of accounts of the BOP in this presentation follows the

definition of the International Monetary Fund (IMF)
※ Because the IMF is the primary sources of statistics for BOPs, its terminologies
are more wildly accepted
※ In fact, this system is also used by the Organization for Economic Cooperation
and Development (OECD) and United Nations System of National Accounts
(UNSNA)
 4-6

The Current Account

• The Current Account (經常帳) includes all international
economic transactions with income or payment flows
occurring within the current year. It consists of the following
four subcategories:
• Goods trade
• The export and import of goods
• The most traditional international economic activities
• The current account is typically dominated by this component, which is
known as the Balance of Trade (BOT) (貿易帳)
• Services trade
• The export and import of services
• Including financial services provided by banks to foreign importers and
exporters, travel services of airlines, and construction services of
domestic firms in other countries
• For the major industrial countries, like the U.S., this subaccount grows
fast in the past decade
The Current Account 經常帳
• Income
• The dividend income from subsidiaries is the income receipts
• The wages and salaries paid to nonresident workers are income
payments
• Current transfers
• The change in ownership of real resources or financial items is called a
transfer
• Any transfer between countries that is one-way–a gift or grant–is
termed a current transfer
• For example, funds provided by the U.S. government to aid a less-
developed nation, or money sent home by migrants and permanent
workers abroad
※Although the information of balance of trade (BOT) is so widely
quoted in the business press in most countries, this number is
somewhat misleading for large industrialized countries because the
service trade is not taken into account
U.S. Trade Balance & Balance on Services & Income,
1985-2007 (billions of US$)

※ The U.S. goods trade balance has been consistently negative, but has been
slightly offset by the continuous surplus in the balance of services trade
Current and Financial/Capital Account Balances for
the U.S., 1992-2007 (billions of US$)

※ The above figure shows the inverse relationship between the balances
of the current account and the capital/financial account in the U.S.
 The China BOP from 1998-2007
There is a surplus on the
basic balance, which
means a net cash inflow of
+ : cash inflow US$437 billion to China
(demand)
– : cash outflow The China government
(supply) sells Renminbi equivalent
to 461 billion US$ in
exchange for increasing
official reserves, i.e.,
providing net supply of
Renminbi by using
Renminbi to purchase
foreign currencies

※ Due to maintain the

fixed exchange rate or said
to diminish the appreciation
pressure, the China
government intervenes
foreign currency markets by
issuing more Renminbi to
purchase foreign currencies
※ The results are the
increase of foreign
exchange reserves and a
possible inflation problem
Current and Financial Account Balance
Relationships for China
• The double surplus in China
• Surpluses in both the current and financial accounts is called the
double surplus phenomenon
• This unusual phenomenon reflects how exceptional the growth of
the Chinese economy is
• Although the current account surplus should create a financial
account deficit, the positive prospects of the Chinese economy
have drawn such massive capital inflows in recent year and thus
the financial account becomes in surplus
• The underestimated value of Renminbi strengthens the capital inflows
• This phenomenon also reflects that China is a world factory–attract
international capital, build factories, produce goods, and export them
Current and Financial Account Balance
Relationships for China
• The China government conduct a lot of intervention to
maintain its balance of payment and thus the relatively fixed
exchange rate against the U.S. dollar
• The appropriate solution is to allow the Renminbi to float and
appreciate. However, it is not in line with China’s current
political plan
The BOP Interaction with Key Macroeconomic
Variables
• A nation’s balance of payments interacts with nearly all
of its key macroeconomic variables
• Interaction means that the BOP affects and is affected
by key macroeconomic factors such as:
• Gross Domestic Product (GDP)
• Exchange rates
• Interest rates
• Inflation rates
Calculation the balance on the current
account
• • CAB = X - M + NCT
• – X = Exports of goods and services
• – M = Imports of goods and services
• – NY = Net income abroad
• – NCT = Net current transfers
• • Theoretically, the balance should be zero, but in the real
world this is improbable
• • A surplus is indicative of an economy that is a net
creditor to the rest of the world.
• • The country is providing an abundance of resources to
other economies, and is owed money in return.
Calculation : Example
 Based on the following information, what is the
balance on the current account?

Exports of goods and services = $12 billion

Imports of goods and services= $14 billion
Net income on investments = -$4 billion
Net transfers = -$1 billion
Increase in foreign holdings of assets in the United States
= $6 billion
Increase in U.S. holdings of assets in foreign countries = -
$3 billion
Calculation
• – Current account deficit
• Occurs when a country's total imports of goods, services
and transfers is greater than the country's total export of
goods, services and transfers. This situation makes a
country a net debtor to the rest of the world
It is important to understand from where a deficit or a
surplus is stemming because sometimes looking at the
current account as a whole could be misleading.
• Current Account + Capital account=0
• In an open economy, part of domestic output is sold to
foreigners (exports) and part of spending by domestic
residents purchases foreign goods (imports).
• – Spending by domestic residents

• – Spending on domestic goods

• We will assume that domestic spending depends on the
interest rate and income

• Net exports

• A rise in foreign income, improves the home country’s

trade balance as it affects the foreign demand of our
exports
• A rise in R or a real depreciation improves our trade
balance as demand shifts from goods produced abroad to
those produced at home.
• A rise in home income raises import spending and hence
worsens the trade balance.