Professional Documents
Culture Documents
Balance of Payments
Lesson 01
TOPICS COVERED
Introduction and definition of Balance of Payment, SDRs
OBJECTIVES
Upon completion of this Lesson, you should be able to:
Explain the Definition, Nature and Scope of
Identify the Objectives and Process of
Importance of
Balance of Payments
Introduction
Let me start with a quote
No nation was ever ruined by trade.
- Benjamin Franklin
The BoP account is the summary of the flow of economic transactions between
the residents of a country and the rest of the world (ROW) during a given time
period.
You must have studied financial management in your earlier sessions.
The BoP is for a country what a statement of sources and uses of funds is for a
company. It measures the flow of international payments and receipts.
As it measures flows and not stocks, it records only the changes in the levels
(and not the absolute level) of international assets and liabilities.
Balance of Payments is described by the IMF in its Balance of Payments Manual
as a statistical statement for a given period showing
Transaction in goods, services and income between an economy and the
rest of the world.
Changes of ownership and other changes in the economys monetary
gold, special drawing rights (SDRs), and claims and liabilities to the rest
of the world; and
Unrequited transfers and counterparts entries that are needed to balance,
in the accounting sense, and entries for the foregoing transactions and
changes which are not manually offsetting.
Let me now explain some difficult words like SDRs, monetary gold etc
What is Special Drawing Rights?
It is a form of international reserve created by the IMF in 1970.
The purpose was to assist international liquidity by providing a complement to
existing reserve vehicle such as
gold
the US Dollars, and
the UK Sterling,
Supply of the first of which was determined by production factors and of the
others by balance of payments outturns.
SDRs are allocated by the IMF to its member countries in proportion
to each countrys quota and are used, as is the rest of the quota
To acquire other national currencies when needed for balance of
payments reasons.
SDRs are therefore a universally recognized claim on national currencies and
thus have the effect, although not yet all the characteristics, of a new currency.
(US
million)
Date
FCA
SDR
GOLD
Forex
Reserves
30-Sep-02
59,663
10 (7.4)
3,300
62,973
31-Dec-02
66,994
7 (5.0
3,444
70,445
31-Mar-03
71,890
4 (2.9)
3,534
75,428
30-Jun-03
78,546
1 (0.9)
3,698
82,244
30-Sep-03
87,213
4 (2.5)
3,919
91,136
Note:
1. FCA (Foreign Currency Assets): FCA is maintained as a multicurrency
portfolio, comprising major currencies, such as, US dollar, Euro, Pound sterling,
Japanese yen, etc. and is valued in US dollar.
2. SDR: Values in SDR have been indicated in parentheses.
3. Gold: Physical stock has remained unchanged at approximately 357 tones.
The SDR has some of the characteristics of a world currency. As mentioned
earlier to you, it was introduced by the IMF in 1970 to boost world liquidity.
Advantages:
The SDR is stable. It is used for accounting purpose by the IMF and even some
multinational corporations. Commercial banks accept deposits and make loans in
SDRs, and it is used to price some international transactions.
Disadvantages:
Since the SDRs is an average of four currencies it is less valuable than the
strongest and is among the first to go when reserves are sold off.
Slide 1
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Slide 2
Balance of Payments
System of accounts which is a subset of the
National Income and Production Accounts
A double-entry bookkeeping system.
Debit Entries: Transactions that generate a
payment outflow (e.g., import).
Credit Entries: Transactions that generate a
payment inflow (e.g., export).
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Slide 3
Balance of Payments
The current account is the broadest measure
of a nations real sector trade.
Includes:
Goods
Services
Income Receipts and Payments
Unilateral Transfers
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Slide 4
Balance of Payments
Goods: Exports and imports of tangible
items.
Services: Exports and imports of services,
for example:
Typical business services such as banking and
financial services, insurance, and consulting.
Tourism
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Slide 5
Balance of Payments
Income Receipts: Includes items such as
Investment income on US-owned assets
abroad.
Receipts of income on US direct
investment abroad.
Government income receipts
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Slide 6
Balance of Payments
Income Payments: Includes items such as
Investment income on foreign-owned
assets in the United States.
Payments of income on foreign direct
investment in the United States
US Government income payments
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Slide 7
Balance of Payments
Unilateral Transfers: Includes items such
as:
Government grants abroad
Private remittances
Private grants abroad
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Slide 8
Millions
Goods
Services
Income Receipts
Imports
Goods
Services
Income Payments
Unilateral Transfers
Current Account Balance
1,414,925
773,304
296,227
345,394
-1,797,061
-1,222,772
-215,239
-359,050
-53,241
-435,377
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Slide 9
Imports: -1,392,145
Goods:
-1,164,746
Services:
-277,399
255,542
-259,512
-58,853
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Slide 10
Balance of Payments
The Financial Sector
In June 1999, US capital account definitions
were modified to bring them more in line
with definitions recommended by the
International Monetary Fund.
Now there are two accounts: The Capital
Accounts and Financial Accounts.
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Slide 11
Balance of Payments
The Financial Sector
The new Capital Account includes items
that were previously included in unilateral
transfers, such as:
Debt forgiveness
Migrants transfers (money brought in and out
as people move from one country to another).
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Slide 12
Balance of Payments
The Financial Sector
The Financial Account
Records international transactions in the
financial sector
Includes portfolio and foreign direct investment
Includes changes in banks and brokers cash
deposits that arise from international
transactions.
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Slide 13
Balance of Payments
The Financial Sector
US-Owned Assets Abroad: Increase or
decrease in US ownership of foreign
financial assets.
Foreign-Owned Assets in the US: Increase
or decrease in foreign ownership of
domestic assets.
Reserve Assets: Primarily the assets of
central banks.
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Slide 14
Balance of Payments
The Financial Sector
Portfolio Investment: Individual or
business purchase of stocks, bond, or other
financial assets or deposits. (An income
strategy)
Foreign Direct Investment: Purchase of
financial assets that results in a 10 percent
or greater ownership share. (A financial
control strategy)
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Slide 15
680
-553,349
US Official Reserve Assets
US Government Assets
US Private Assets
Foreign-Owned Assets
Foreign Official Assets
Other Foreign Assets
Net Financial Flows
-290
-715
-552,344
952,430
35,909
916,521
399,761
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Slide 16
1,285
?
-178,985
-3,681
-32
-175,272
706,983
94,860
612,123
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Slide 17
-480,861
-1,285
+527,988
Statistical Discrepancy
-45,852
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Slide 18
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