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BOP. Lerzan Özkale. BALANCE OF PAYMENTS (BOP). The record of a country’s transactions in goods, services and assets with the rest of the world is its balance of payments. The BOP is also the record of a country’s sources (supply) and uses (demand) of foreign exchange.

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Bop

BOP

Lerzan Özkale

N. Lerzan Özkale


Balance of payments bop

BALANCE OF PAYMENTS(BOP)

  • The record of a country’s transactions in goods, services and assets with the rest of the world is its balance of payments.

  • The BOP is also the record of a country’s sources (supply) and uses (demand) of foreign exchange.

  • The distinction between the balance of payments and a balance sheet:

    • A balance sheet for a firm measures its stock of assets and liabilities at a moment in time.

    • The balance of payments, by contrast, measures flows, usually over a period of a month, a quarter, or a year.

N. Lerzan Özkale


Bop

BOP

BOP records economic transactions between the residents and government of a particular country and the residents and governments of the rest of the world.

Concept of Residency

In BOP accounting, an individual may be a resident of one country and a citizen of another (roughly after 18 months).

A firm may be resident in a country other than the country in which its headquarters is located.

This means that their transactions with other residents of the countries in which they reside ordinarily do not have BOP effects.

Even for their payments in the money of their own country, they are considered as foreign resident because their holdings of their home country’s currency are considered foreign-held by their home country.

But government employees residing in a foreign country are not considered resident of this country.

N. Lerzan Özkale


Bop

BOP

Transaction Concept

Most BOP transactions involve current or future money flows, but there are some exceptions:

  • Barter trade

  • Shipment of equipment to foreign subsidiaries by the corporations for increasing their investments abroad: no payment. The merchandise trade is affected without offsetting flow of money.

  • Unilateral transfers:

    • government grants, pension payments etc.

    • Profits of a subsidiary which the parent company allows the subsidiary to retain. The profits are not remitted to the parent so no actual transaction occurs. But, it is general practice to present reinvested earnings of subsidiaries in the BOP as if they were remitted to the parents and returned to the subsidiaries.

N. Lerzan Özkale


Bop

BOP

Statistical Disrepancy Account

  • Time lags

  • Changes in recording procedures

  • Random variations in unrecorded transactions

  • Underground Economy Hypothesis

  • Over or under statement of the current account deficit

    problems of under or overinvoicing in foreign trade

  • Under statement of the exports and investment income

  • Understatement of net capital inflows / outflows

  • The role of exchange rates (ER differences in time)

N. Lerzan Özkale


Estimated size of the underground hidden economy of gnp

Estimated Size of the Underground (hidden) Economy (% of GNP)

Poland34Denmark16Netherlands 8

Hungary31Finland11Australia7

Spain21Germany11France6

Greece20USA10Norway5

Italy16UK10Japan3

N. Lerzan Özkale


Bop

BOP

CURRENT ACCOUNT

Trade in goods:

Exports (credit (+) item on the current account) FOB

Imports (debit (-) item on the current account) CIF

Trade in services: (freight, insurance etc)

BALANCE OF TRADE

Investment income (dividends, interest, rent, profits from Foreign assets holdings like stocks, bonds or from real assets: building, factories)

Investment payments

Net transfer payments and other ( a check to a parent abroad, a check by the government to a retiree living in another country+ interest paid by the government to foreigners)

BALANCE ON CURRENT ACCOUNT

N. Lerzan Özkale


Bop

BOP

CAPITAL ACCOUNT

For each transaction recorded in the current account, there is an offsetting transaction recorded in the capital account.

Ex: A US citizen purchasing a Japanese car

Yen/Dollar ER = 125 yen/dollar

Price of the car= 2.5 million yen = $ 20.000

The US citizen takes $ 20.000, buys 2.5 million yen and buys the car.

BOP: Imports increased by $ 20.000 in the current account

Foreign assets in the US (Japanese holdings of US $) are increased by $ 20.000 in the capital account.

The net wealth position of the US vis-a vis the rest of the world has decreased by $ 20.000.

N. Lerzan Özkale


Bop

BOP

An increase in the US imports results in an increase in foreign assets in the US.

The US must pay for the imports and whatever it pays with (in this example, in US dollars), is an increase in foreign assets in the US.

Conversely, an increase in US exports results in an increase in US assets abroad, because foreigners must pay for the US exports.

N. Lerzan Özkale


Bop

US BOP of 1997All transactions bringing forex into US are credited (+) to the CAAll transactions causing US to lose forex are debited (-) to the CA

CURRENT ACCOUNTbillions of US $

Goods exports 682.3

Goods imports-888.5

(1) Net export of goods-206.2

Export of services 257.6

Import of services-170

(2) Net export of services 87.6

Income received on investments 242.4

Income payments on investments-255.7

(3) Net investment income -13.3

(4) Net transfer payments and other -36.8

(5) Balance on current account (1+2+3+4)-168.7

N. Lerzan Özkale


Us bop cont d

US BOP ( cont’d)

CAPITAL ACCOUNT

(6) Change in private US assets abroad (increase is -) -405.3

(7) Change in foreign private assets in US 588.2

(8) Change in US gov. assets abroad (increase is -) -1.0

(9) Change in foreign gov. assets in the US 90

(10) Balance on capital account (6+7+8+9) 271.9

(11) Statistical disrepancy -103.2

(12) Balance of Payments (5+10+11) 0

N. Lerzan Özkale


National saving investment and the current account

National Saving, Investment, and the Current Account

National income accounting identity is:

Y = C + I + G + X

WHERE

Y : national income or GDP (Gross Domestic Product)

C : consumption

G : government expenditures (spending)

X : net exports (exports minus imports sometimes also referred as X - M)

N. Lerzan Özkale


National saving investment and the current account1

National Saving, Investment, and the Current Account

Y - C - G = S = I + X

WHERE

S : national saving

This equation indicates that national saving is equal to the sum of investment spending plus the current account (CA) (net exports),

which implies that the CA must be equal to the national saving (S) minus investment spending (I):

X = S - I

N. Lerzan Özkale


National saving investment and the current account2

National Saving, Investment, and the Current Account

X = S - I

If domestic saving S > I

CA surplus (positive X)

If domestic saving S < I

CA deficit (negative X)

N. Lerzan Özkale


National saving investment and the current account3

National Saving, Investment, and the Current Account

A country where spending is greater than income has investment greater than saving, and a current account deficit.

The excess of spending over income must be financed by foreign investment,

so there will be a capital account surplus to match the current account deficit.

N. Lerzan Özkale


National saving investment and the current account4

National Saving, Investment, and the Current Account

The BOP values are affected by changes in international spending and saving behaviour.

This behaviour may be

  • on the part of households and business firms

    (private sector)

  • or on the part of government

    (public sector)

N. Lerzan Özkale


National saving investment and the current account5

National Saving, Investment, and the Current Account

There are two kinds of saving:

private: Y - T - C

T: Taxes

government: T - G

National saving is equal to private saving plus government saving.

S = (Y - T - C) + (T - G)

N. Lerzan Özkale


National saving investment and the current account6

National Saving, Investment, and the Current Account

S = (Y - T - C) + (T - G)

+/- +/-

For many years, for the US

the first one was +,

the second one was -

Government saving is the negative of government budget deficit.

N. Lerzan Özkale


National saving investment and the current account7

National Saving, Investment, and the Current Account

A government spending more than its tax revenue creates government dissaving and contribute to a larger CA deficit.

The CA deficit and Capital Account surplus could be reduced by reducing the government budget deficit so that government dissaving falls.

National income, spending and national saving are closely related with BOP.

N. Lerzan Özkale


National saving investment and the current account8

National Saving, Investment, and the Current Account

Reducing the current account deficit requires:

  • increasing domestic saving relative to investment

    and

  • increasing domestic output relative to domestic spending.

N. Lerzan Özkale


Bop

N. Lerzan Özkale


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