9,10 bop revised
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The Balance of PaymentsThe Balance of Payments
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IntroductionThe measurement of all internationaleconomic transactions between the
residents of a country and foreignresidents is called the balance ofpayments (BOP)
The two major sub accounts of the
balance of payments are:Current account
Financial account
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Fundamentals of Balance ofPayments Accounting
The balance of payments must balanceSub accounts may be imbalanced
Three main elements to the process ofmeasuring international economicactivity include:
Identifying whatisand isnotaninternational
economictransactionUnderstanding how theflow ofgoods,services,assets,and money creates debitsand creditstotheoverall BOP
Understandingthebookkeeping proceduresforBOP accounting
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Defining InternationalTransactions
Identifying manyinternationaltransactions isordinarily not difficult
However, some
internationaltransactions are notobvious
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The BOP: BusinessTransactions
There are two types of
business transactionsthat dominate the BOP:
Realassets
Financialassets
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BOP Accounting: Double-Entry BookkeepingBOP employs anaccounting
technique calleddouble-entrybookkeeping
In this age-old
method everytransaction producesa debit and a creditof the same amount
A debit is createdwhenever:
AnassetisincreasedAliability is decreased
An expenseisincreased
A credit is created
whenever:Anassetis decreased
Aliability isincreased
An expenseisdecreased
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BOP Accounting: Double-Entry Bookkeeping
The measurement of all internationaltransactions in and out of a country
over a year is a difficult taskMistakes, errors, and statisticaldiscrepancies will and do occur
Current and capital and financial
account entries are recordedindependent of one another, nottogether as this accounting methodwould prescribe
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II- Capital and Financial Account
A. CapitalAccount
a. Capital Transfers (ownership transferoffixed assets, debtforgiveness etc)
b. Acquisition/ disposalofnon produced,
nonfinancialassets (patents,copyrights,trademarks,franchises,leases etc)
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B. Financial Account
a. Direct Investment
1. Abroad (directinvestorsofreportingcountry with directinvestmententerprisesabroad (10%orabove)
2.
InReporting
Country (forinvestmentinthereportingcountry)
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BOP
b. Portfolio Investment
1.Assets (holdingsofresidentsofreportingcountry- equities,debentures, money marketinstruments,financial derivatives)
2. Liabilities (forinvestmentsintothereportingcountry)
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BOP
C. Otherinvestments
Assets (Held by residentsofthereportingcountry - tradecredits,repurchaseagreements, depositsandcurrency)
Liabilities ( forliabilitiesofresidentsofthereportingcountry)
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BOP
d.Reserveassets (Assets with countrys
monetary authorities- monetary gold,SDRs,reserve positionsin IMF,foreigncurrency, depositsand securities)
e. Errorsand Omissions (Balancing Item)
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Major Items of India's balance of Payments (April-December, 2008)
(In $ million)
April-December
(2008-09) (P)
April-December
(2007-08) (PR)Exports 133,527 113,614
Imports 238,864 182,894
Trade Balance -105,337 -69280
Invisibles, net 68,868 53772
Current AccountBalance
-36,469 -15508
Capital Account* 16,089 82,682
Change in Reserves#(+ indicates
increase;- indicatesdecrease)
20,380 -67,174
Including errors & omissions; # On BoP basis excluding valuation; P:
Preliminary, PR: Partially revised. R: revised
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The Accounts of the Balanceof Payments
The BOP is comprised of twoprimary sub accounts:
CurrentAccount
Financial/CapitalAccount
Two additional and important sub
accounts of the BOP include:NetErrorsand OmissionsAccount
OfficialReservesAccount
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The Current AccountThis account includes allinternational economictransactions with income or
payment flows occurring withinthe year, the current period
It consists of four subcategories:
Goods trade
Services trade
Income
Current transfers
This account is typically dominatedby Goods Trade
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The Current AccountThe Balance on Trade (BOT) refersspecifically to the balance of exportsand imports of goods trade only- Flows
of income between residents and nonresidents
Merchandise trade is the core ofinternational trade and has three major
components:Manufactured goods
Agriculture
Fuels
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The Financial/Capital andFinancial Account
This account of the BOP measures
all international economictransactions of financial assets
It is divided into two majorcomponents:
CapitalAccount
FinancialAccount
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The Capital AccountThe Capital Account is made up oftransfers of:
Financial assetsThe acquisition and disposal ofnonproduced/nonfinancial assets
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The Financial AccountThe Financial Account consistsof three components:
Direct investment
Portfolio investment
Other asset investments
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Net Direct InvestmentThis is the net balance of capitaldispersed out of and into the U.S. forthe purpose of exerting control over
assetsFollows the 10% ownership thresholdrule
The source of concern over foreigninvestments in any country focuses ontwo topics:
Control
Profit
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Portfolio InvestmentThis is the net balance of capital thatflows in and out of the country but doesnot reach the 10% ownership threshold
of direct investmentIt is capital invested in activities thatare purely profit-motivated rather thanones made in the prospect of controlling
or managing the investmentThese have shown much more volatilebehavior than net direct investmentsover the past decade
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Other InvestmentAssets/Liabilities
This category consists of:
Short-term trade credits
Long-term trade credits
Cross-border loans from all types offinancial institutions
Currency deposits
Bank deposits
Other accounts receivable
Accounts payable
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Official Reserves AccountThis is the total currencyand metallic reserves heldby official monetary
authorities within thecountry
Its significance depends onwhether the country is
operating under:A fixed exchange rate regime
A floating exchange ratesystem
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The Balance of Payments--TotalThe International Monetary Fund (IMF) is themultinational organization that collects theBOP statistics for over 160 different countries
around the globe
The current, capital, and financial accountscombine to form the basic balance and is oneof the most frequently used summary
measures of the BOPThe current, capital, financial, and net errorsand omissions accounts combine to form thesummary measure known as the overallbalance or official settlements balance
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The Balance of Payments andEconomic CrisesThe sum of cross-border internationaleconomic activity can be used by
international managers to forecasteconomic conditions and in some cases,the likelihood of economic crises
The mechanics of internationaleconomic crises often follow a similarpath of development
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Capital FlightCapital flight is the suddenand shocking outflow of
capital from a nationseconomy in which it isperceived there ispolitical, economic, or
currency crisesforthcoming
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BOP key indices
Trade Balance
Merchandise Balance- Difference Between
exportsand importsofgoodsBalanceofgoodsand services- Merchandisebalance+ algebraicsum ofservicestrade
Current-accountbalance-measureofacountrysnetborrowingorlending:
+ balance=netlendingabroad
- balance= netborrowingfrom foreigners
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Savings and investment
Current-accountbalance plusthecapital
accountbalance measuresthedifferencebetween whatacountrysavesand whatitinvests
Ifacountry invests morethanitsaves,itmustborrow the differencefromabroad,importingcapital
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Other indictors
Country debtcomposition,size
Compositionofimports- whetheracountry isconsumingorinvestingborrowed funds
Paymentsbalance-Reserves- totalandchangesinreserves
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