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Balance of payments accounting1

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1) The document discusses balance of payments accounting, which tracks the flow of goods, services, and financial transactions between a country and the rest of the world. It is made up of the current account and the capital/financial account. 2) The current account tracks trade in goods/services and income flows. A trade deficit means expenditure on imports exceeds earnings from exports. 3) The capital/financial account tracks the financial flows that result from trade imbalances. It must equal the negative of the current account to maintain overall balance.

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Balance of Payments Accounting By Dr. Neelam Tandon
The Balance of Payments Recall the open economy accounting identity: Income = Expenditures Y = C + I + G + NX Trade Deficits imply NX< 0 Therefore, Y- (C + I + G) = NX < 0 Trade deficit countries are spending more than they earn (borrowing from the rest of the world)
Balance of Payments Accounting Anything that we buy or sell to the rest of the world must be paid for. The current account (CA) tracks the flow of goods and services between India and the rest of the world The capital & financial account tracks the payments for those goods & services (KFA) CA + KFA = 0
The Current Account Any transaction that represents a flow of funds out of India is represented by debit (-). Transactions that represent a flow of money into India are represented by a credit(+) Net Exports of Goods and Services Exports (+) Imports (-) Net Income From Abroad (NFP) Income Earned by Indian nationals abroad (+) Income earned by foreign nationals in India (-) Net Unilateral Transfers Payments from foreign countries (+) Payments to foreign Countries (-)
The Indian Current Account: 2006 (in Millions of Rs.) Exports of Goods, Services, and Income Goods: Rs. 713,122 Services: Rs. 307,381 Income Receipts: Investment Receipts: Rs. 291,354 Employee Compensation: Rs. 3,031 Imports of Goods, Services and Income Goods: - Rs. 1,260,274 Services: - Rs. 256,337 Income Receipts: Investment Receipts: - Rs. 252,573 Employee Compensation: - Rs. 8,533 Net Unilateral Transfers: - Rs. 67,439 Current Account : - Rs. 530,668
The Capital & Financial Account Again, any transaction that represents funds flowing into (out of) India are credits (debits) in the KFA Financial assets Foreign acquisition of Indian assets (+) Indian acquisition of foreign assets (-) Official Reserve Assets Foreign acquisition of Indian reserve assets (+) Indian acquisition of foreign reserve assets (-)
The Indian Capital & Financial Account: 2006 (in Millions of Rs) Capital Account: - Rs. 3,079 Indian Owned Assets Abroad (Increase/Financial Outflow (-)) Indian Official Reserve Assets: Rs. 1,523 Indian Government Assets: Rs. 537 Indian Private Assets: - Rs. 85,574 Foreign Owned Assets in India (Increase/Financial inflow (+)) Foreign Official Assets in India : Rs.248,573 Foreign Private Assets in the India : Rs. 580,600 Capital And Financial Account: Rs.542,680 CA + KFA = -Rs.530,668 + Rs.542,680 = -Rs.12,012
Balance of Payments Accounting Consider three transactions: Wal-Mart buys $100M worth of clothing from a Chinese Manufacturer. Wal-Mart pays for the clothing by writing a check drawn off its account at Bank of America. Warren Buffet collects $50M in interest payments from his financial investments overseas. The Payment is made by crediting Warrens bank account in London. Microsoft sells $20M worth of software to the French government. They pay in cash.
Balance of Payments Accounts Current Account Exports Goods: Services: Imports Goods: Services: Net Factor Income: Net Unilateral Transfers: CA Balance: Capital & Financial Account Foreign acquisition of US assets: US Treasuries: Private Securities: FDI: Currency: US acquisition of foreign assets: FDI: Foreign Securities: Official Reserve Assets Foreign acquisition of US ORA: US acquisition of foreign ORA: KFA Balance: -$100M (1) $100M (1) $50 (2) -$50 (2) $20M (3) -$20M (3) -$30M $30M
Tsunami Relief Aid President Bush recently authorized $350M in aid for the Asian countries affected by the Tsunami. This will appear in the BOP accounts under unilateral transfers. Assume we pay this transfer in cash (most likely we would pay by check)
Balance of Payments Accounts Current Account Exports Goods: Services: Imports Goods: Services: Net Factor Income: Net Unilateral Transfers: -$350M CA Balance: -$350M Capital & Financial Account Foreign acquisition of US assets: US Treasuries: Private Securities: FDI: Currency: $350M US acquisition of foreign assets: FDI: Portfolio Investment: Official Reserve Assets Foreign acquisition of US ORA: US acquisition of foreign ORA: KFA Balance: $350
Balance of Payments and Exchange Rates Should the Balance of Payments Accounts influence exchange rates? A BOP deficit (surplus) indicates that financial assets flowing out of (into a) country. Shouldnt that indicate a currency depreciation? No really.the balance of payments is an accounting statement. Given the pattern of exchange rates, the BOP indicates the transactions that took place (Remember, by definition, BOP=0)
The US BOP The US is running record trade deficits due to over consumption (US domestic savings is low and the government deficit is large) Unlike past years, this trade deficit is NOT being financed by foreign private investment in the US, but rather by central banks purchasing US government debt..this is potentially troubling!

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Balance of payments accounting1

  • 1. Balance of Payments Accounting By Dr. Neelam Tandon
  • 2. The Balance of Payments Recall the open economy accounting identity: Income = Expenditures Y = C + I + G + NX Trade Deficits imply NX< 0 Therefore, Y- (C + I + G) = NX < 0 Trade deficit countries are spending more than they earn (borrowing from the rest of the world)
  • 3. Balance of Payments Accounting Anything that we buy or sell to the rest of the world must be paid for. The current account (CA) tracks the flow of goods and services between India and the rest of the world The capital & financial account tracks the payments for those goods & services (KFA) CA + KFA = 0
  • 4. The Current Account Any transaction that represents a flow of funds out of India is represented by debit (-). Transactions that represent a flow of money into India are represented by a credit(+) Net Exports of Goods and Services Exports (+) Imports (-) Net Income From Abroad (NFP) Income Earned by Indian nationals abroad (+) Income earned by foreign nationals in India (-) Net Unilateral Transfers Payments from foreign countries (+) Payments to foreign Countries (-)
  • 5. The Indian Current Account: 2006 (in Millions of Rs.) Exports of Goods, Services, and Income Goods: Rs. 713,122 Services: Rs. 307,381 Income Receipts: Investment Receipts: Rs. 291,354 Employee Compensation: Rs. 3,031 Imports of Goods, Services and Income Goods: - Rs. 1,260,274 Services: - Rs. 256,337 Income Receipts: Investment Receipts: - Rs. 252,573 Employee Compensation: - Rs. 8,533 Net Unilateral Transfers: - Rs. 67,439 Current Account : - Rs. 530,668
  • 6. The Capital & Financial Account Again, any transaction that represents funds flowing into (out of) India are credits (debits) in the KFA Financial assets Foreign acquisition of Indian assets (+) Indian acquisition of foreign assets (-) Official Reserve Assets Foreign acquisition of Indian reserve assets (+) Indian acquisition of foreign reserve assets (-)
  • 7. The Indian Capital & Financial Account: 2006 (in Millions of Rs) Capital Account: - Rs. 3,079 Indian Owned Assets Abroad (Increase/Financial Outflow (-)) Indian Official Reserve Assets: Rs. 1,523 Indian Government Assets: Rs. 537 Indian Private Assets: - Rs. 85,574 Foreign Owned Assets in India (Increase/Financial inflow (+)) Foreign Official Assets in India : Rs.248,573 Foreign Private Assets in the India : Rs. 580,600 Capital And Financial Account: Rs.542,680 CA + KFA = -Rs.530,668 + Rs.542,680 = -Rs.12,012
  • 8. Balance of Payments Accounting Consider three transactions: Wal-Mart buys $100M worth of clothing from a Chinese Manufacturer. Wal-Mart pays for the clothing by writing a check drawn off its account at Bank of America. Warren Buffet collects $50M in interest payments from his financial investments overseas. The Payment is made by crediting Warrens bank account in London. Microsoft sells $20M worth of software to the French government. They pay in cash.
  • 9. Balance of Payments Accounts Current Account Exports Goods: Services: Imports Goods: Services: Net Factor Income: Net Unilateral Transfers: CA Balance: Capital & Financial Account Foreign acquisition of US assets: US Treasuries: Private Securities: FDI: Currency: US acquisition of foreign assets: FDI: Foreign Securities: Official Reserve Assets Foreign acquisition of US ORA: US acquisition of foreign ORA: KFA Balance: -$100M (1) $100M (1) $50 (2) -$50 (2) $20M (3) -$20M (3) -$30M $30M
  • 10. Tsunami Relief Aid President Bush recently authorized $350M in aid for the Asian countries affected by the Tsunami. This will appear in the BOP accounts under unilateral transfers. Assume we pay this transfer in cash (most likely we would pay by check)
  • 11. Balance of Payments Accounts Current Account Exports Goods: Services: Imports Goods: Services: Net Factor Income: Net Unilateral Transfers: -$350M CA Balance: -$350M Capital & Financial Account Foreign acquisition of US assets: US Treasuries: Private Securities: FDI: Currency: $350M US acquisition of foreign assets: FDI: Portfolio Investment: Official Reserve Assets Foreign acquisition of US ORA: US acquisition of foreign ORA: KFA Balance: $350
  • 12. Balance of Payments and Exchange Rates Should the Balance of Payments Accounts influence exchange rates? A BOP deficit (surplus) indicates that financial assets flowing out of (into a) country. Shouldnt that indicate a currency depreciation? No really.the balance of payments is an accounting statement. Given the pattern of exchange rates, the BOP indicates the transactions that took place (Remember, by definition, BOP=0)
  • 13. The US BOP The US is running record trade deficits due to over consumption (US domestic savings is low and the government deficit is large) Unlike past years, this trade deficit is NOT being financed by foreign private investment in the US, but rather by central banks purchasing US government debt..this is potentially troubling!