The Balance of Payments

1. The Balance of Payments Understanding the components

2. Structure of the BOP Current Account Capital and Financial Account Goods Credits +Goods Debits +Net Services =BOGS +Net primary income +Net secondary income =Balance on Current Account Capital Account Plus Financial Account Direct Investment +Portfolio Investment +Other Investments +Reserve Assets +Financial Derivatives = Financial Account = Balance on Capital and Financial Account Net errors and omissions

3. Pre-learning You need to know the definition of each of these to understand the BOGS • Define • Exports • Imports • Credit • Debit • Services

4. The Balance on Goods and Services

5. Pre-learning • Investment • Borrowing • Lending • Foreign ownership • Interest • Rent • Profit • Dividends • Deficit • Surplus You need to understand all of these ideas to understand the net primary income

6. Income credits + Income debits = net primary income Income credits Income debits

7. Pre-learning You need these ideas for net secondary income, but this is a small and relatively insignificant part of the BOP • Unrequited • Insurance • Aid • Pensions

8. secondary credits +secondary debits = net secondary income credits debits

9. Each of the flows on the Current Account are NON-REVERSIBLE. Now you should get the balance on current account…you just add all of the bits together. Some may be positive numbers, some negative, so watch the signs…

10. Balance on Current Account Add together: Goods Balance Net services Net primary income Net secondary income To get the Balance on Current Account • List the things that you don’t get:

11. Pre-learning • Migrants can bring capital with them: • Foreign aid can be capital items: • Intellectual property can be traded across nations: To get the capital account, you need to know these things:

12. Capital Account • Capital transfers • Capital brought by migrants • Intellectual property

13. Pre-learning • Investment • Shares • Securities • Derivatives • Trade credits • Loans This bit is tricky…you need to get the meaning of all of this first…then you can understand the credit and debit flows on the financial account. Tricky…

14. Direct Investment

15. Portfolio Investment

16. Other investment

17. Pre-learning • Monetary gold • Special drawing rights • The IMF • The RBA • Foreign exchange Reserve assets…small but important. You need to get all of this first…

18. Reserve Assets

19. Pre-learning…so what is a derivative? What has each of these images to do with derivatives?

20. Financial Derivatives • What are they: • Credits and debits:

21. Balance on Capital and Financial Account Add together: Capital Account With the Financial Acc FDI Portfolio I Other investments Financial Derivatives Reserve Assets To get the Balance on Capital and Financial account Add net errors and omissions to balance the balance of Payments

22. Net errors and omissions

23. I am green about: I am orange about: I am red about:

24. Key links…some pre-learning • Explain each of these things: • The balance of payments balances • The floating dollar makes the balance of payments balance • The difference between the principle and the interest on a loan • The difference between foreign investment and returns on investment • The difference between equity and debt