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**BOP A record of all economic transactions between a country and the rest…
**BOP
A record of all economic transactions between a country and the rest of the world :star:
CAPTIAL ACCOUNT :confetti_ball:
: Records inflows & outflows of capital (money for investment)
ST CAPITAL FLOWS
(hot money: money flow rapidly from 1 country to another in search of higher returns & to exploit expected changes in exchange rate)
BANK DEPOSITS
ST LOANS
TREASURY BILLS
LT CAPITAL FLOWS
DIRECT INVESTMENTS
Flow of investment funds entering the country & leaving it (building of production plants)
LT capital inflow (foreign firms invest in yr country) LT capital outflow (local firms invest overseas)
PORTFOLIO (financial) INVESTMENTS
Funds generated from purchase/ sales of LT bonds & financial securities(> 1 yr) or assets such as patents/trademarks
CAPITAL AC SURPLUS: capital inflow> outflow CAPITAL AC DEFICIT
CAPITAL A/C DEFICIT NOT NECESSARILY BAD: if deficit is due to LT investment abroad--> wld generate future Y from abroad in form of profits/dividends--> Credits in current a/c in future
CURRENT ACCOUNT :confetti_ball:
Records a country's trade in goods & srvs with the rest of the world & Y flows to and from other countries
VISIBLE TRADE ACCOUNT
: Measures value of export and import of GOODS ONLY :red_flag:
VISIBLE BALANCE (BALANCE OF TRADE) : Value of Visible exports - Value of visible imports
BOT SURPLUS IN GOODS
: Value of X > Value of M
BOT DEFICIT IN GOODS:
Value of X < Value of M
INVISIBLE TRADE ACCOUNT
: Records provision of SERVICES to overseas & expt on foreign srcs by locals :red_flag:
FACTOR Y ACC/ NET Y FLOWS FROM ABROAD
3 items in the acc:
1) SERVICES:
X & M of srvs such as shipping, insurance, tourism, govt expt, & receipts
2) INTEREST/ PROFIT/ DIVIDENDS:
Received from investment abroad or paid to foreigners owning assets in SG
in form of shares & investment as well as property or real estate
3) UNILATERAL TRANSFERS:
transfer of fund which do not involve any economic transactions
Payments not in exchange for gds & srcs or financial assests
e.g) private remittances like private gifts // family remittances & govt transfers like aids to foreign countries/donations
BOT SURPLUS/DEFICIT IN SERVICES
Measures whether a country is living its means & also reflects international competitiveness of the economy
exports (flow of income) imports (flow of expenditure)
CURRENT ACCOUNT BALANCE: shows overall net position of current a/c items
CURRENT ACCOUNT DEFICIT (<0)
may have to borrow from other countries (affect official financing acc) or reduce limited stock of foreign reserves (affect official financing acc)
CURRENT ACCOUNT SURPLUS (>0)
total earnings from visible & invisible trade> total expenditure on visible and invisible trade
IMPROVING/WORSENING
E.G) current a/c is in surplus and the surplus has improved/ increased
OFFICIAL FINANCING ACCOUNT :confetti_ball:
: shows how a govt. finances an external eqm
Records accumulation or reduction of official reserves of gold & foreign exchange as a result of an imbalance of current & capital a/c
shows how a surplus is used & how deficit is financed
When theres a BOP SURPLUS: foreign exchange reserves increases // repayment of loans to the IMF/foreign central banks increases (ALL THESE ARE DEBIT ITEMS)
When theres a BOP DEFICIT: foreign exchange reserves decreases// borrow from IMF or foreign central banks (CREDIT ITEMS)
CREDIT ITEMS
(money inflow); items that allow a country to gain foreign earnings --> foreign reserves increases :!!:
DEBIT ITEMS
(money outflow): items that require foreign exchange payment to foreign countries--> foreign reserves fall :!!:
BOT
= X of gds - M of gds
Balance of invisible trade
=X of srvs - M of srvs+ net investment Y flow+ transfers
Current a/c
= BOT + Balance of invisible trade
Capital a/c
= LT capital flows + ST capital flows
Total currency flow
=Current a/c + Capital a/c+ balancing item
Official financing
= -Total currency flow
Balancing item:
accounts for errors & omission in the current & capital a/c
BOP ALWAYS BALANCES( not equal to BOP equilibrium) due to changes in foreign reserves in the official financing a/c
BOP SURPLUS(+)
: Net inflow will be used by central bank to build up foreign currency (-)(Add foreign reserves) + repay foreign debt(-)--> BOP=0, Hence BOP balances
BOP DEFICIT (-) :
Central bank will cover it by running down foreign currency reserves (+) +borrow from overseas (+)
Should aim to achieve
LT BOP EQUILIBRIUM
Achieved when trade & capital flows into & out of country are equal over a no. of years
DESIRABLE BECAUSE
Prevents country's foreign currency from depleting
ensure more stable exchange rate-->promote trade & FDI