Balance of PaymentPaymentNew zealand

Presented By Rahul Surya-35 SuryaFinance Student ITMITM-W

The New World Economy



The world economy has become increasingly interconnected:



Globalization: Globalization: markets exceed national boundaries; increased mobility of workers, products, and information. Integration: Integration: people of different countries choose to function jointly in governance, economic interests, currency, etc.

Developments


The possibility of such a global economy has been brought about by:
  

 

Collapse of communism Lower transportation costs Advances in telecommunications (internet, etc.) related technological innovations Economic need These have led to reductions in trade barriers
  

General barriers Integration and free trade zonesEurope, North America, etc. zones The relaxation of bank and capital market regulations

Top 20 Globalized Nations

Rank 1 2 3 4 5 6 7 8 9 10 Nation Ireland Switzerland Sweden Singapore Netherlands Denmark Canada Austria United Kingdom Finland Rank 11 12 13 14 15 16 17 18 19 20 Nation United States France Norway Portugal Czech Republic New Zealand Germany Malaysia Israel Spain

Source: Foreign Policy

Sectors


Economists typically separate the production and sale of goods and services from the exchanges of financial assets.


Real Sector: production and sale of goods and Sector: services. Financial Sector: transactions in global, foreign, or Sector: domestic financial assets.

Measurement is difficult because trade may include services (invisibles) and electronic commerce.

Balance of Payments


A record of international transactions between residents of one country and the rest of the world International transactions include exchanges of goods, services or assets Residents means businesses, individuals Residents and government agencies, including citizens temporarily living abroad but excluding local subsidiaries of foreign corporations

Current Account


The current account is that balance of payments account in which all short-term shortflows of payments are listed:


Goods and services balance (exports imports)

 

Merchandise trade balance (exports imports) Services balance (exports imports)

 

Net Investment income Unilateral transfers

 

Private transfer payments Governmental transfers

What are Services?

       

Travel and tourism Trade transportation Insurance Education Financial, technical, and marketing services Telecommunication Use of property rights (royalties) Other professional and consulting services

What is Investment Income?



Payment to holders of foreign financial assets, including:

 

Interest on bonds and loans Dividends and other claims on profits by owners of foreign businesses Payments made to temporary (nonresident) workers

Unilateral Transfers


 

Official government grants in aid to foreign governments Charitable giving (e.g., famine relief) Migrant workers transfers to families in their home countries

Capital Account


The capital and financial account is that balance of payments account in which all cross-border crosstransactions involving financial assets are listed. This includes transactions between foreign and domestic residents, and foreign and domestic governments.


All purchases or sales of assets, including:

    

Direct investment Securities (debt) Bank claims and liabilities Official reserves transactions When U.S. citizens buy foreign securities or when foreigners buy U.S. securities, they are listed here as outflows and inflows, respectively.

Foreign Direct Investment (FDI)



Any flow of lending to, or purchases of ownership in, a foreign enterprise that is largely owned by residents of the investing country.
   

Securities (stocks and bonds) Loans Bank deposits Minority ownership positions

FDI is the purchase of assets to establish financial control of a foreign entity. Generally ownership of 10% or more of a companys outstanding stock is considered FDI. Portfolio investment involves little management control or interest, and is solely for financial gain.

Official Reserve Assets

 

Early on in this century, this was primarily gold Now primarily financial assets denominated in a foreign currency that is widely accepted in international transactions:
    

Euro assets (heavily used by U.S.) Yen assets (heavily used by U.S.) U.S. dollar assets (key currency worldwide) Reserve positions in IMF SDRs (created by IMF)

Official Reserves Transactions



Governments can influence exchange rates by reserves. buying and selling official reserves. The buying and selling of official reserves is recorded in the official transactions account.


Also referred to as changes in holdings of official changes international reserves or official settlements balance. balance.

It is the part of the balance of payments accounts that records the amount of its own currency or foreign currencies that a nation buys or sells.

Statistical Discrepancy?


It is the net result of errors and omissions on both the credit and debit sides. Where do these errors come from?
   

UnderUnder-reporting merchandise imports UnderUnder-reporting investment incomes UnderUnder-reporting capital exports Basically, people succeed in hiding their imports, foreign investment incomes, capital flight from their governments for tax and other purposes.

Account Overview (Level 2)

Current Account
Merchandise trade exports imports Trade Balance Services military trans. (net) other services, net Service Balance Balance on goods & services Investment income, net Unilateral transfers US government grants US govt pensions, and other transfers Private remittances and other transfers All transfers, net Balance on current account

Capital Account
Changes in US assets abroad, net other US govt assets US private assets All changes, net Changes in foreign assets in the US, net foreign private assets All changes, net

Changes in holdings of official international reserves, net Statistical discrepancy

Balance on capital account

Current Account


The difference between the import and export of goods is sometimes called the balance of merchandise trade. trade.


Although the popular press often uses this measure, the merchandise trade balance is not a good summary because services are an important component of trade.

The balance on goods and services includes trade in services. This includes visible and invisible trade .

Current Account, 1970-2002 1970200 100 0 -100 -200 -300

Current Account

-400 -500 -600

1970

Goods Services

1975

1980

1985

1990

1995

2000

Current Account Surplus and Deficit



A current account surplus means exports of goods and services, investment income and transfers exceed imports and outflows. A current account deficit means imports of goods and services, and outflows are greater than exports and inflows; must be financed by borrowing (capital account inflows).

Linkage to NIPA and the Domestic Economy



Current Account (CA) surplus equals net (CA) foreign investment (If ). CA = If . (I


   

If If > 0, the country has net foreign investment, so the country must be investing part of its saving abroad, and S = Id + If . That means If = S Id . Recall that Y = C + Id + G + (X M). (X Also, CA = X M. Domestic Expenditures E = C + Id + G, and Y E = X M = CA C + Id + G is sometimes referred to as absorption. absorption.

Meaning of Overall Balance



The current account and the capital account measure the private and non-U.S. government nonsupply of and demand for dollars. Official Settlements Balance: Balance: B = CA + KA Because the balance of payments must sum to zero, any imbalance in the official settlements balance must be financed (paid for) by official reserves flows: B + OR = 0

BOP Surplus and Deficit



The Official Settlements Balance (B ) is sometimes (B referred to as the net sum of the items above the transactions, line or autonomous transactions, and The Official Reserves Transactions (OR ) are referred to as the sum of the items below the line, also called nonautonomous or accommodating transactions. transactions.


 

When B = 0, there is said to be a BOP equilibrium, and if B { 0, a BOP disequilibrium. disequilibrium. When B > 0, there is said to be a BOP surplus. surplus. When B < 0, there is said to be a BOP deficit. deficit.

BOP Surplus and Deficit (Continued)



In terms of the supply and demand of a nations currency, there is:



A balance of payments surplus if quantity demanded for a currency exceeds quantity supplied, putting upward pressure on the value of the nations currency. A balance of payments deficit if quantity supplied of a currency exceeds quantity demanded, putting downward pressure on the value of the nations currency.

Official Transactions Account



Most of the Official Reserves flows are official interventions by the countrys monetary authorities in the foreign exchange markets. When a government buys its own currency to hold up the currencys price, we say that the government has supported its currency. currency.


It is holding the exchange rate higher than that rate otherwise would have been.

When it sells its currency, it is attempting to depress the value of its currency.


It is forcing the exchange rate to be lower than that rate would otherwise have been.

Official Transactions Account



Because they are an accounting identity, the current, capital, and official transactions accounts must sum to zeroin total, the zero balance of payments balances. balances. The supply of currency, including governments, must equal the demand for currency, including governments.

1999 Balance of Payments Accounts

1. Current Account 2. Merchandise 3. Exports 4. Imports 5. Balance of trade 6. Services 7. Exports 8. Imports 9. Balance of services 10. Balance of goods and services

+683 -1,030 -347 +277 -197 +80 -256

1999 Balance of Payments Accounts

11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Net invesment income Net transfers Invest. trans. balance Balance on current account Capital account Capital inflows Capital outflows Balance on capital account Current and capital balance Statistical discrepancy Official transaction account Totals -25 -47 -72 -339 +751 -373 +378 -39 -36 +3 0

BEA International Transactions Data May 19, 2003, U.S. International Transactions (Millions)
Line (Credits +; debits -)/1/ 2000 2001 2002/p/ Current account 1 Exports of goods and services and income receipts 1,417,236 1,281,793 1,216,504 2 Exports of goods and services 1,064,239 998,022 971,864 3 Goods, balance of payments basis/2/ 771,994 718,762 682,586 4 Services/3/ 292,245 279,260 289,278 12 Income receipts 352,997 283,771 244,640 13 Income receipts on U.S.-owned assets abroad 350,656 281,389 242,177 14 Direct investment receipts 149,677 125,996 128,068 15 Other private receipts 197,133 151,832 110,766 16 U.S. Government receipts 3,846 3,561 3,343 17 Compensation of employees 2,341 2,382 2,463 (1,774,135) (1,625,701) (1,663,908) 18 Imports of goods and services and income payments 19 Imports of goods and services (1,442,920) (1,356,312) (1,407,406) 20 Goods, balance of payments basis/2/ (1,224,417) (1,145,927) (1,166,939) 21 Services/3/ (218,503) (210,385) (240,467) 29 Income payments (331,215) (269,389) (256,502) 30 Income payments on foreign-owned assets in the United Sta (323,005) (260,850) (247,601) 31 Direct investment payments (60,815) (23,401) (50,121) 32 Other private payments (179,217) (156,784) (124,542) 33 U.S. Government payments (82,973) (80,665) (72,938) 34 Compensation of employees (8,210) (8,539) (8,901) 35 Unilateral current transfers, net (53,442) (49,463) (56,023) 36 U.S. Government grants/4/ (16,821) (11,628) (16,914) 37 U.S. Government pensions and other transfers (4,705) (5,798) (5,131) 38 Private remittances and other transfers/6/ (31,916) (32,037) (33,978)

39 40 41 46 47 48 49 50 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 70a

Capital and financial account Capital account Capital account transactions, net 837 826 708 Financial account U.S.-owned assets abroad, net (increase/financial outflow (-)) (606,489) (370,962) (156,169) U.S. official reserve assets, net (290) (4,911) (3,681) U.S. Government assets, other than official reserve assets, net (941) (486) 379 (5,182) (4,431) (5,213) U.S. credits and other long-term assets Repayments on U.S. credits and other long-term assets/8/ 4,265 3,873 5,696 U.S. foreign currency holdings and U.S. short-term assets, ne (24) 72 (104) U.S. private assets, net (605,258) (365,565) (152,867) Foreign-owned assets in the United States, net (increase/financ1,015,986 752,806 630,364 Foreign official assets in the United States, net 37,640 5,224 96,630 U.S. Government securities 30,676 31,665 74,013 (10,233) 10,745 43,656 U.S. Treasury securities/9/ Other/10/ 40,909 20,920 30,357 Other U.S. Government liabilities/11/ (1,909) (1,882) 158 U.S. liabilities reported by U.S. banks, not included elsewhere 5,746 (30,278) 18,831 Other foreign official assets/12/ 3,127 5,719 3,628 Other foreign assets in the United States, net 978,346 747,582 533,734 Direct investment 307,747 130,796 30,114 (76,965) (7,670) 53,155 U.S. Treasury securities U.S. securities other than U.S. Treasury securities 455,213 407,653 284,611 U.S. currency 1,129 23,783 21,513 U.S. liabilities to unaffiliated foreigners reported by U.S. nonb 174,251 82,353 49,736 U.S. liabilities reported by U.S. banks, not included elsewhere 116,971 110,667 94,605 Statistical discrepancy (sum of above items with sign reversed) 7 10,701 28,524 Of which: Seasonal adjustment discrepancy ..... ..... .....

Memoranda

Line 71 72 73 74 75 76

(Credits +; debits -)/1/ 2000 2001 2002/p/ (452,423) (427,165) (484,353) Balance on goods (lines 3 and 20) Balance on services (lines 4 and 21) 73,742 68,875 48,811 (378,681) (358,290) (435,542) Balance on goods and services (lines 2 and 19) Balance on income (lines 12 and 29) 21,782 14,382 (11,862) Unilateral current transfers, net (line 35) (53,442) (49,463) (56,023) Balance on current account (lines 1, 18, and 35 or lines 73, 74, an (410,341) (393,371) (503,427)

Conclusion


In order to buy U.S. assets foreigners need dollars, so net capital inflows represent a demand for dollars.


The demand for dollars comes from the demand to buy goods and services and the demand to buy (capital) assets.

In the 1980s, the inflow of capital into the U.S. greatly exceeded the outflow of capital from the U.S., and this trend has continued into the late 1990s. (KA > 0, CA < 0) (KA

International Investment Position (IIP) is another related balance sheet. It is a statement of the stocks of a nations international assets and foreign liabilities at a point in time, usually the end of a year. Any capital flows (related to a current account imbalance) creates a change in the IIP. IIP.

We say that a nation is a lender or a borrower depending on whether its current account is in surplus or deficit during a time period.  We say that a nation is a creditor or debtor depending on whether its net stock of foreign assets is positive or negative. The first refers to flows over time, the second to stocks at a point in time.


 

Prior to WWI, the U.S. was a net debtor. From WWI through 1983, the U.S. was a net creditor (the worlds leading creditor). Since 1983, the U.S. has run large current account deficits, requiring intl borrowing. By 1989, the U.S. was a net debtor, and continues to be so until the present.