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ECONOMICS 11TOPIC 12
OPEN ECONOMY MACROECONOMICS
U-PRIMO E. RODRIGUEZDept. of Econ., UPLB
Meaning of “Open Economy”
Most modern economies do
not operate in isolation.
Countries rely in varying
degrees on trade with other
countries on goods and
services for their
consumption and production
needs.
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The transactions among countries extend to transfer payments, sales and purchases of assets, borrowing and lending, etc.
A country that engages in such transactions is called an open economy
Balance of PaymentsBalance of Payments (BOP) - a summary of the transactions between residents and non-residents of a country over a given period
It records transactions in goods, services, assets and transfers. Keeps track of the country's transactions with the rest of the world. The information helps in analyses that could assist in the formulation of economic policies and decisions.
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Item Values Sub-totals
Current Account (CA) 7,177
Goods & services
Exports 69,721
Imports -80,845
Income (net) -871
Transfers (net) 19,172
Capital Account (KA, net) 181
Financial Account (FA) 5,520
Direct Investment (net) 341
Portfolio Investment (net) 3,523
Others (net) 1,656
Net unclassified items (NUC) -3,642
Overall BOP Position (CA + KA + FA + NUC) 9,236
Reserves and Related Assets (RRA) -9,236
BOP Acct of the Phil, 2012 (preliminary, million USD)
Source: Bangko Sentral ng Pilipinas, www.bsp.gov.ph
Current AccountThe Current Account
reflects the flow of the country's transactions in goods and services, investments as well as current transfer payments.
Inflows = earnings of residents from non-residents
Outflows = payments of residents to non-residents
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Capital Account
Capital Account
the sum of the Capital Account and Financial
Account
represents capital transfers, changes in the
resident claims on non-residents (changes in
assets), and changes in non-resident claims on
residents (changes in liabilities).
Financial AccountThe Financial Account captures transactions in equity and other financial assets. It is classified into
Direct Investment represents transactions in equity capital, reinvested earnings, etc. Portfolio Investment represents transactions in
equity securities and debt securities (bonds and notes, money market instruments, etc.). Other Investment (net) includes trade credits,
short to long term loans, currency and other deposits
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Reserves and Related Assets
Reserves and Related Assets are composed of
Exceptional Financing, Use of Fund Credit and
Loans and Reserve Assets.
Reserve Assets represent changes in the assets of
the monetary authorities that can be used for
balance of payments purposes. It is composed of
Monetary Gold, Special Drawing Rights (SDR),
Foreign Exchange and Other claims.
Net Unclassified ItemsTheoretically, the sum of the Current Account, Capital Account, Financial Account and Reserves and Related Assets must be zero, i.e.,
CA+KA + FA + RRA = 0.
The myriad of transactions between residents and non-residents poses difficulties for recording and compiling entries. These eventually cause the sum of the to be non-zero.
To capture the presence of such a discrepancy, the practice is to present it as a separate item in the BOP accounts - Net Errors and Omissions.