What does BoP stand for
Balance of Payment
Describe the BoP briefly
- A statistical summary of transactions
- Between domestic and foreign residents
- Over a specified period of time (usually one year)
–> The BoP basically represents an accounting of a country’s international transactions.
But: The BoP is not a balance sheet but a cash flow statement!
What is BoP informative about?
- The BoP can be informative about the health of an economy
- and may signal potential shifts in exchange rates.
What is it commun to group the accounts as?
- Current account (CA)
- Capital and financial account (KFA)
- Statistical discrepancies; Errors and omissions (E&O)
How are the transactions recorded?
Each transaction is recorded twice (as in standard double-entry accounting):
- As a source of foreign currency (a conceptual inflow of foreign money)
- and as a use of foreign currency (a conceptual outflow of foreign money)
How is the sources and uses shown in the BoP?
- Sources get a plus sign (credit). The source side tells us where we obtained the money. (export of goods or services, income from labor or capital abroad, foreign assets sold, borrow from abroad, deplete bank account!)
- Uses get a minus sign (debit). The use side tells us what we did with the money. (import of goods or services, pay income or dividends, buy foreign assets, lend money internationally, give money as development aid, put money into bank account!)
What happens to the BoP in this example?
A U.K. company exports goods to a customer in Singapore who pays cash
U.K. CA: + (export of goods, source of foreign money)
U.K. KFA: – (use of foreign money, put in bank account)
What happens to the BoP in this example?
A U.S. company imports goods from Germany, German firm lends money
U.S. CA: – (import of goods, use of foreign money)
U.S. KFA: + (receive loan, source of money)
What happens to the BoP in this example?
A U.S. investor buys shares for GBP 50m of a British company for speculation and sells an equal amount of British bonds
U.S. KFA: + (bonds sold, source of money)
U.S. KFA: – (equities bought, use of money)
What happens to the BoP in this example?
A Russian IT company sells computers for RUB 1m to a British consulting firm in exchange for services
Russian CA + (export of goods, source of money)
Russian CA – (import of services, use of money)
What is the formulae for calculating the BoP?
CA + KFA + EO = 0,
Is there a difference in the formuae for BoP between different countries/circumstances?
If yes, what is the formulae then?
It is the same formulae, however for countries with a fixed exchange rate it is sometimes useful to write:
CA + Regular-KFA + DCB reserves +EO = 0,
why is there a difference in the formulae for BoP between fixed and floating exchange rates?
to separate intervention from private capital flows.
What can be said about a country with a positive current account?
It is a net exporter
What is the relationship between KFA and CA?
Since the CA and KFA are linked by the accounting identity, the KFA is basically the flip sign of the CA.
When is a country accumulating claims against the rest of the world?
When it has a a positive CA (negative KFA) balance
When is a country a net importer?
A country with a negative current account balance is a net importer.
What does a negative CA (positive KFA) balance mean?
A negative CA (positive KFA) balance means that the rest of the world is accumulating claims against the country.
Why is the CA account important?
One reason why the CA balance is important is that it reflects a country’s net borrowing needs.
For example, the United States ran a CA deficit of USD 470 billion (in 2010). Means that other countries must have lent this amount to the U.S
And what does NIIP stand for?
What is the relationship between CA and NIIP?
And what is the difference?
1) Net International Investment Position
2) CA is related to the changes in NIIP. NIIP means the difference between
- foreign assets owned by home residents, and
- domestic assets owned by foreigners
and is a measure of net foreign wealth of a country.
3) The NIIP refers to a stock while the CA refers to a flow
