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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
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
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.
balance of payments account categories
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
double entry principle
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
balance of payments balances
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
how does the bop balance
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

the current account entries
The Current Account Entries
  • Merchandise Trade
          • Exports (+)
          • Imports (-)
  • Service Trade
          • Exports (+)
          • Imports(-)
  • Investment Incomes
          • Incomes received (+)
          • Incomes paid (-)
  • Unilateral Transfers
capital accounts entries
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
bop deficits and surpluses
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
bop foreign exchange markets
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
a balanced set of transactions
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
foreign exchange markets
Foreign Exchange Markets

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(i$, iY, ee,ef)

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foreign exchange markets a flexible rate system
Foreign Exchange Markets: A Flexible Rate System

S

$

e1

At parity : (i$ - iY)=p

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

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e2

(i$, iY, ee,ef)

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