CHP 3

Balance of Payments Accounting
 The Balance of Payments is the statistical record

of a country’s international transactions over a
certain period of time presented in the form of
double-entry bookkeeping.
 “a country’s balance of payments” refers to the
transactions of its citizens and government.
 BOP Indonesia: based on accrual basis
For more details, visit
http://www.bi.go.id/id/publikasi/lain/lainnya/Pages/met
_npi_09.aspx
3-1
Balance of Payments Accounts
 The balance of payments accounts are those that

record all transactions between the residents of a
country and residents of all foreign nations.
 any transaction that results in a receipt from
foreigners will be recorded as a credit, with a
positive sign, in the country balance of payments,
 any transaction that gives rise to a payment to
foreigners will be recorded as a debit, with a
negative sign.
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Example 3.1
 Suppose that Boeing Corporation exported a
Boeing 747 aircraft to Japan Airlines for $50
million, and that Japan Airlines pays from its
dollar bank account kept with Chase Manhattan
Bank in New York City. Then, the receipt of $50
million by Boeing will be recorded as a credit (+),
which will be matched by a debit (−) of the same
amount representing a reduction of the U.S.
bank’s liabilities.
 The principle of double-entry bookkeeping
3-3
Example 3.3
 Suppose that Thomson Corporation (U.S.
company) acquires Reuters (British news agency)
for $750 million, and that Reuters deposits the
money in Barclays Bank in London, which, in
turn, uses the sum to purchase U.S. treasury notes.
In this case, the payment of $750 million by Thomson
will be recorded as a debit (−), whereas Barclays’
purchase of the U.S. Treasury notes will be recorded
as a credit (+).
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The summary of the transactions
Example 3.1
 Credit: Boeing’s export +$50 million
 Debit: Withdrawal from U.S. bank –$50 million
Example 3.2
 Debit: Thomson's acquisition of Reuters –$750
million
 Credit: Barclays’ purchase of U.S. securities +
$750 million
Balance of Payments Accounts
 are composed of the following:

 The Current Account
 The Capital Account
 The Official Reserves Account
 Statistical Discrepancy
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The Current Account
 Merchandise trade, i.e. all imports and exports

of goods.
 Services (invisible trade), e.g. payments and
receipts for legal, consulting, and engineering
services, royalties for patents and intellectual
properties, insurance premiums, shipping fees,
and tourist expenditures
3-7
The Current Account
 Factor income, e.g. payments and receipts of

interest, dividends, and other income on foreign
investments that were previously made.
 Unilateral transfers, e.g. foreign aid, reparations,
official and private grants, and gifts.
 For the purpose of preserving the double-entry
bookkeeping rule, unilateral transfers are regarded as an
act of buying goodwill from the recipients. So a country
that gives foreign aid to another country can be viewed
as importing goodwill from the latter.
3-8
The Current Account
 If the debits exceed the credits, then a country is

running a trade deficit.
 If the credits exceed the debits, then a country is
running a trade surplus.
 See Example 3.1
3-9
The Capital Account
 The capital account measures the difference

between a country sales of assets to foreigners
and the country purchases of foreign assets.
 The capital account is composed of Foreign
Direct Investment (FDI), portfolio investments
and other investments.
 See Example 3.3
3-10
Sovereign Wealth Funds
 Government-controlled investment funds are

playing an increasingly visible role in
international investments.
 SWFs are mostly domiciled in Asian and Mid-
East countries usually are responsible for
recycling foreign exchange reserves of these
countries swelled by trade surpluses and oil
revenues.
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Statistical Discrepancy (net errors
and omissions)
 There’s going to be some omissions and
misrecorded transactions—so we use a “plug”
figure to get things to balance.
 Mostly is due to differences in the sources of data
causing some misrecorded or errors and
omissions.
 In practice, it is difficult to trace the sources of the
errors and omissions
3-12
The Official Reserves Account
 Official reserves assets include gold, foreign

currencies, SDRs, reserve positions in the IMF.
3-13
The Balance of Payments Identity
BCA + BKA + BRA = 0
where
BCA = balance on current account
BKA = balance on capital account
BRA = balance on the reserves account
 Under a fixed exchange rate regime,

BCA + BKA = −BRA
 Under a pure flexible exchange rate regime,
BCA + BKA = 0
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Balance of Payments and the
Exchange Rate
Credits Debits Exchange rate $
Current Account
1 Exports $2,096.3 P S
2 Imports ($2,818.0)
3 Unilateral Transfers $24.4 ($114.0)
Balance on Current Account ($811.3)
Capital Account
4 Direct Investment $180.6 ($235.4)
5 Portfolio Investment $1,017.4 ($426.1)
6 Other Investments $690.4 ($400) D
Balance on Capital Account $826.9
7 Statistical Discrepancies ($18)
Overall Balance ($2.4) Q
Official Reserve Account $2.4
3-15
Exchange Rate
Current Account
2 Imports ($2,818.0)
Capital Account
As U.S. citizens import, they are supply dollars to the FOREX market.
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Exchange Rate
Current Account
2 Imports ($2,818.0)
Capital Account
As U.S. citizens export, others demand dollars at the FOREX market.
3-17
Exchange Rate
Current Account
2 Imports ($2,818.0) S1
Capital Account
As the U.S. government sells dollars, the supply of dollars increases.
3-18
The J-Curve Effect
Following a currency
depreciation, the trade
Change in the Trade Balance
balance may at first

deteriorate before it
improves.
Time The shape depends on
the elasticity of the
imports and exports.
As an example, consider an imported good for which
there is no domestic producer. If demand is price
inelastic, then following a depreciation the trade
balance gets worse (until domestic production begins).
3-19
Mercantilism and the Balance of Payments
 Mercantilism holds that a country should avoid

trade deficits at all costs, even to imposing
various restrictions on imports.
 Mercantilist ideas were criticized in the 18 th
century by such British thinkers as Adam Smith,
David Ricardo, and David Hume.
 They argued that the main source of wealth in a
country is its productive capacity not its trade
surpluses.
3-20

CHP 3

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CHP 3

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Balance of Payments Accounting

 The Balance of Payments is the statistical record

 The balance of payments accounts are those that

 Debit: Withdrawal from U.S. bank –$50 million

 are composed of the following:

 Merchandise trade, i.e. all imports and exports

 Factor income, e.g. payments and receipts of

 If the debits exceed the credits, then a country is

 The capital account measures the difference

 Government-controlled investment funds are

 Official reserves assets include gold, foreign

 Under a fixed exchange rate regime,

balance may at first

 Mercantilism holds that a country should avoid

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