Balance of Payments

Antu Panini Murshid

Todays Agenda

Balance of payments Review sustainability of current accounts

Balance of Payments Accounts

The balance of payments is a comprehensive statement of a countrys economic transactions with the rest of the world for a given period of timenormally a quarter or a year It is composed of the current account and the capital account

Current Account

The current account measures transactions associated with trade in goods and services, income from abroad and also transfers and gifts

Remember the current account is more than simply the balance of trade, which is a narrower concept

Capital Account

The capital account measures financial transactions, such as purchases of bonds and equities or direct investment activities

The Balance of Payments Must Balance

The current account and capital account should balance each other out Each international transaction gives rise to two offsetting entries one appearing in the current account and the other appearing in the capital account Thus a current account surplus is matched by a capital account deficit and a current account deficit is matched by a current account surplus

The Change in Foreign Reserves

The change in foreign reserves refers to the sale and purchase of official reserve assets by central banks

Official reserves are foreign assets held by the central bank (usually as cushion against economic troubles)

The Change in Foreign Reserves

The change in foreign reserves appears in the capital account, although sometimes people will separate this item from the capital account and refer to a balance of payments deficit (or surplus) Change foreign reserves = CA + KA
Balance of payments
Here KA refers to the non-reserve capital account

Example
Current Account
Trade balance = -$90 billion Net factor income from abroad = -$10 billion

Capital account
Net private inflows = $80 billion Change in foreign reserves = -$20 billion

Current account balance Capital account balance = -$100 billion = +$100 billion

US Balance of Payments Accounts, 1999

Current Account
Merchandise Trade Balance Trade Balance on Services

Capital Account
-344.82 Capital Inflows (e.g. foreign borrowing, receive + sign) 77.27 Capital Outflows (e.g. US lending, receive a sign) 751.32 -421.13

Overall Trade Balance

Net Foreign Income From Abroad Balance on Goods and Services and Income Net Unilateral Transfers (e.g. foreign aid donations) Current Account Balance

-267.55 Statistical discrepancy

-24.78 Change in Official Reserves -292.33 Capital Account Balance -46.59 -338.92

17.45
-8.72 338.92

Sustainability of the Current Account

What factors affect the sustainability of a current account deficit?

Growth rate Composition of the current account Openness CA/GDP and debt burden Composition of capital flows Foreign exchange reserves Financial system Political stability