Balance of Payments
Summary of transactions between domestic and foreign residents for a specific country over a specified period of time.
- Usually a quarter or a year
- Transactions of business, individuals and government (US) and R.O.W.
- Composed of current account, capital account, and financial account
What transactions are included in BoP?
- exchanges of merchandise (goods), services
- current factor income payments
- transfer payments (gifts, foreign aid, grants)
- and purchase and sale of financial assets
Current account
Summary of flow of funds due to purchase of goods or services (e.g. sale of wheat of cameras, or paying a CPA or lawyer) or the provision of income on financial assets (e.g. stock dividends)
Capital account
Summary flow of funds resulting from the sale of assets between one specified country and all other countries over a specified period of time (instead of goods and inventory, think assets - buildings, intellectual property)
Financial account
Refers to special types of investment, including DFI (direct foreign investment) and portfolio investment
Payments for Goods and Services
Merchandise exports and imports represent tangible products that are transported between countries. Services exports and imports represent tourism and other services. The difference between total exports and imports is referred to as the BALANCE OF TRADE - the primary component of the Current Account.
- Service exports by the United States result in an inflow of funds to the U.S.; service imports result in an outflow
- A deficit in the U.S. balance of current account means value of merchandise and services exported by the U.S. is less than the value of merchandise and services it imports
Primary Income Payments (factor income)
Represents income (interest and dividend payments) received by investors on foreign investments in financial assets (securities).
- Mostly income by MNC’s on foreign subsidiaries or fixed asset (DFI) and income by investors in foreign securities
- Net primary income is the net of funds received from foreign investment and funds paid out to foreign investors.
Secondary Income
Represent aid, grants, and gifts from one country to another (transfer payments).
Capital account
- Originally included in the financial account
- Includes the value of financial assets transferred across country borders by people who move to a different country, or due to sales of patents and trademarks
- Relatively minor (in terms of dollar amounts) compared to financial account
Direct Foreign Investment
Investments in fixed assets in foreign countries
- Acquisition of a U.S. firm by a non-U.S. firm are positive flows of funds
- Acquisition of a foreign firm by a U.S. firm are negative flows of funds
- Construction of a facility or expansion of a facility
Portfolio investment
Transactions involving long term financial assets (stocks and bonds) between countries that do not affect the transfer of control (investments in foreign securities)
- Example: Buy Heineken stock, but not enough to take control
- (If you purchased a controlling interest, it would be DFI)
Relationship between the accounts
- If a country has a negative Current Account balance, it should have a positive financial and capital account
- Implies if more money is sent out of the country than received due to trade and income payments, it should receive more money than it spends of foreign investments
- (China sells more to U.S. but buys a lot of U.S. debt)
