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CHAPTER 3 BALANCE OF PAYMENT - Coggle Diagram
CHAPTER 3
BALANCE OF PAYMENT
Overview of the balance of payment
Definition
Transactions that result in the payment of a domestic resident to a foreign resident are recorded on the "debit" side
The current account in a country's balance of payments records the transactions in goods and services between residents of the country and residents of the country abroad.
A current account surplus occurs when the have is greater than the debtor.
A current account surplus when a country exports more than it imports or when it saves more than it invests
A current account deficit as the country imports more or invests more.
A large current account deficit implies that a country has limited financial resources to sustainably import and invest.
Classification
Goods trade
Includes all goods which add to, or subtract from, the stock of material resources of a country by entering its economic territory (imports) or leaving it (exports).
Goods are physical, produced items over which ownership rights can be established and whose economic ownership can be passed from one institutional unit to another by engaging in transactions.
Goods being transported through a country or temporarily admitted or withdrawn (except for goods for inward or outward processing) are not included.
Services
Include payments and receipts for legal, consulting, financial, and engineering services; royalties for patents and intellectual properties; shipping fees; and tourist expenditures.
These trades in services are sometimes called invisible trade
Primary income
The third category of the current account consists largely of payments and receipts of interest, dividends, and other income on foreign investments that were previously made.
Secondary income
The fourth category of the current account, involves “unrequited” payments called current transfers.
For the purpose of preserving the double-entry bookkeeping rule, when goods, services, or assets are provided without a corresponding return of something of economic value, the corresponding entry is made as a transfer.
Balance of Payment Accounts
Current Account
Definition
Records the transactions in goods and services between residents of the country and residents of the country abroad.
A current account surplus when a country exports more than it imports or when it saves more than it invests
Deficit as the country imports more or invests more.
A large current account deficit implies that a country has limited financial resources to sustainably import and invest.
Classification
Goods trade
Services
Primary income
Secondary income
The Capital Account
Capital transfers involve
Change of ownership
Acquisition
Disposal of an asset
Tend to be large and infrequent.
Nonproduced
Nonfinancial assets
Natural resources
Land
Mineral rights
Air space
Marketing assets
Brand
Domain names
Contracts
Leases
Licences
Financial account
Definition
A component of a country’s balance of payments that covers claims on or liabilities to nonresidents
Three categories
Direct investment
Portfolio investment
Another investment
Statistical Discrepancy
Representing omitted and misrecorded transactions
Recordings of payments and receipts arising from international transactions are done at different times and places, possibly using different methods.
Overall balance
The balance of payments
The Official Reserves Account
Meaning
A term used to denote the account where all sorts of reserves are held by the monetary authorities or the central banks of the various countries.
Importance
This account holds, stores and shows the foreign currency and other securities of the government.
Balance the BOP in case of a deficit
Change the exchange rate to support the government policies.
Relation with Balance of Payments
Balance of Payments is an account that shows the summary of all the receipts and payments a country has with other countries in a year.
Shows a country’s trade performance (import and export), the foreign investment that a company gets, country’s foreign exchange reserves and more.
Balance-of-Payments Trends in Major Countries
Major Countries
China
a surplus on the current account.
Tends to realize a surplus on the financial account as well until recently
United States
Current account deficit continuously since 1982
Surplus on the financial account, except only in 1991
As recently as 1986, the United States was considered a net creditor nation
Japan
Japan ran a financial account surplus in 2003, 2011 and 2013
Japan has had a string of continuous current account surpluses since 1982
Japan emerged as the world's largest creditor nation
Germany
From 1991 to 2001, Germany ran a current account deficit
Traditionally had a current account surplus
United Kingdom
A current account deficit
A financial account surplus
Overview
This “global imbalance” implies that the United States and United Kingdom generally use up more outputs than they produce, whereas the opposite holds for China, Japan, and Germany
China, Japan, and Germany tend to realize current account surpluses
The United States and United Kingdom tend to realize current account deficits
15 trading partners of the United States
The United States trades most actively with China, the second largest economy in the world
Canada, Mexico are the next most important trading partners
Japan, Germany, Korea, and the United Kingdom as the next major trading partners
The Balance-of-Payments Identity
Under the fixed exchange rate regime
BCA + BKA + BFA = - BRA
Under a pure flexible exchange rate regime
BCA + BKA = - BFA
When the balance-of-payments accounts are recorded correctly
BCA + BKA + BFA + BRA = 0