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The Balance of Payments What is the Balance of Payments? The structure of the balance of payments What are the BOP accounts? The BOP Recording Method: Double-Entry Bookkeeping Method Balance of Payments Balances The Balance of Payments and the FX Market Balance of Payments

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The Balance of Payments

  • What is the Balance of Payments?

  • The structure of the balance of payments

  • What are the BOP accounts?

  • The BOP Recording Method: Double-Entry Bookkeeping Method

  • Balance of Payments Balances

  • The Balance of Payments and the FX Market


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Balance of Payments

  • The balance of payments is an accounting listing (tabulation) of the values of economic (trade and financial) transactions between the residents of a (home) country and residents of other countries.

  • Balance of payments entries are recorded based on the double-entry bookkeeping principle.

  • The balance of payments entries are always balanced; the entries add up to zero.


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Balance of Payments Account Categories

  • Current Accounts

    • Merchandise Trade

    • Service Trade

    • Services of Capital: Interest Incomes, Dividends

    • Unilateral Current Transfers

  • Capital Accounts

    • US private investments abroad

    • Foreign private investments in the US

    • Other investments/capital transactions

    • Errors and statistical discrepancies

  • Official (Capital) Accounts

    • (Changes in) US official reserve assets abroad: gold, SDRs, foreign currencies

    • (Changes in) foreign official assets in the US


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    Double-Entry Principle

    • Each transaction affects at least two account

    • Debit entries balance credit entries

      • Imports are debit entries ( Autonomous transactions)

      • The balancing (credit) entry(ies) for an import take(s) place in one (or more) sections of capital the accounts (Accommodating transactions)

      • Exports are credit entries ( Autonomous transactions)

      • The balancing (debit) entry(ies) for an export take(s) place in one (or more) sections of the capital accounts (Accommodating transactions)

      • Capital inflows (increases in foreign assents) are credit entries

      • Capital outflows (increases in US residents-owned assets abroad) are debit entries

      • Increases in US claims against residents of other countries are debit entries

      • Increases in foreign residents’ claims against US are credit entries


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    Balance of Payments Balances

    • Balance of Merchandise Trade

    • Balance Merchandise and Services

    • Current Account Balance

      • Capital Account Balances

      • Official Settlement Balance

      • Statistical errors

  • Overall Balance = 0


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    How does the BOP balance?

    Debit(-)Credit (+)

    Exports 100(+)

    Imports 120(-)

    Current Account Balance -20

    Reduction in US bank

    Deposit claims abroad 10

    Official Settlement Balance -10

    Reduction in official

    reserves 10

    Balance of Payments 00


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    The Current Account Entries

    • Merchandise Trade

      • Exports (+)

      • Imports (-)

  • Service Trade

    • Exports (+)

    • Imports(-)

  • Investment Incomes

    • Incomes received (+)

    • Incomes paid (-)

  • Unilateral Transfers


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    Capital Accounts Entries

    • Unofficial Capital Transactions

      • Purchase (or sale) of foreign assets

        (Direct and indirect)

      • Purchase (or sale) of home assets by foreign residents

        (Direct and indirect)

  • US Official Accounts

    • US Assets

      • Gold reserves

      • FX reserves (deposits)

      • SDRs

  • Foreign Official Assets in the US (US liabilities)

    • US government securities held by foreign officials

    • US Treasury bills held by foreign officials

    • Other foreign official assets in the US

    • Other liabilities to foreign official


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    BOP Deficits and Surpluses

    • Current Balance + Capital Balance+ Official Settlement Balance + Statistical discrepancies = 0

    • Balance of Merchandise Trade

    • Balance of Merchandise and Service Trade

    • Current Balance

    • Capital Balances

    • Current Balance + Capital Balance + Statistical discrepancies = BOP

    • BOP = Official Settlement Balance


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    BOP &Foreign Exchange Markets

    • Given that each nation state has its own currency (with which domestic transactions are carried out), all international transactions potentially generate either supply of or demand for foreign exchange.

    • Generally, transactions resulting in debit entries in the BOP generate demand for FX(e.g., imports, investments abroad); transaction resulting in credit entries generate demand(e.g., exports, foreign investments in the US)

    • Foreign exchange markets are places, systems, or mechanisms through which currencies are exchanged or traded.

    • Overall (multilateral) BOP accounts and bilateral BOP accounts


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    A balanced set of transactions

    • A balanced set of transactions does affect the official settlement balance:

      • An import finance by the seller

      • A foreign investment investment financed by an American bank holding FX deposits in a foreign bank


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    Foreign Exchange Markets

    S

    $

    e1

    eo

    e2

    (i$, iY, ee,ef)

    D

    Yen

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    Foreign Exchange Markets: A Flexible Rate System

    S

    $

    e1

    At parity : (i$ - iY)=p

    (i$ - iY) = ( ee-e)/e

    eo

    e2

    (i$, iY, ee,ef)

    D

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    o