This chapter covers the measurement and interpretation of all international transactions between one country and the rest of the world: that is, the balance of payments. The main goals of the chapter are to: Explain how the double-entry bookkeeping system of measuring Balance of Payments (BOP) works with reference to the IMF standard balance of payments, outline the specifics of Australia’s balance of payments, establish the importance of BOP for international companies.
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Chapter 10 The balance of payments
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Lecture plan
• Definition of balance of payments
• The IMF standard presentation
• The current account
• The capital and financial account
• The double-entry system; examples of
records
• Australia’s balance of payments
• Comparative current account balances
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The balance of payments (BOP)
• Record of the value of all the economic
transactions between
– residents of one country (e.g individuals, firms, governments) and
– residents of all other countries during a given time period.
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The balance of payments (BOP) cont.
• Double-entry bookkeeping system
• For nations with floating currencies, the
entire balance of payments by definition must numerically balance, while individual accounts or subaccounts may not balance.
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The standard IMF presentation
• Current account
• Capital and financial account
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An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–6
Current account
International transactions involving goods and/or services, income and current transfers Main items:
1 Goods and services
(a) goods (5 items)
(b) services (11 items)
2 Income
(a) compensation of employees
(b) investment income (e.g FDI profits, other)
3 Current transfers (payments in cash and kind
by residents to non-residents)
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Capital and financial account
The country's transactions in monetary
and ownership claims.
1 Capital account
(a) capital transfers (e.g involving
transfers of ownership of fixed assets); general government and other
(b) acquisition/disposal of non-produced,
non-financial assets (e.g intangibles, such as patented entities, leases,
goodwill)
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Capital and financial account cont.
2 Financial account
(a) direct investment
(b) portfolio investment
(c) other investment (e.g trade credits,
loans, currency and deposits, other) (d) reserve assets
Net errors and omissions
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Imports of goods
Item/
Commodity
Debit (B$ million)
Credit (B$ million)
1–A1 Goods 10.0 Oil imports
2–B3b Other
investment
10.0 Decreases
in S-T foreign assets held by residents
Source: Exercise 1, p.243
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Imports of services
Item/
Commodity
Debit (B$ million )
Credit (B$ million)
1–A21
Transportation
services
1.0 Payments
for freight services
2–B3b
Other S-T
investment
1.0 Decrease in
S-T foreign assets held
by residents
Source: Exercise 2, p.243
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Investment income
(B$ million)
Credit (B$ million)
1–B2 Investment
income 4.0 Profits of
FDI in Bucksland 2–B1 Direct
investment 2.0 Increased investment in
Bucksland enterprises 2–B3b Other
S-T
investment
2.0 Decreases in
S-T domestic
liabilities
Source: Exercise 3, p.243
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Current transfers
Item/
Commodity
Debit (B$ million)
Credit (B$ million)
1–C1 Current
transfers 0.5 Payment in kind to non-
residents
1–A1 Goods 0.5 Food exports
Source: Exercise 4, p.244
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Direct investment
Item No/
Name
Debit (B$ million)
Credit (B$ million)
2–B1
Direct
investment
14.0 Increased
investment in foreign enterprises 1–A1
Goods
7.0 Exports to
resident destinations 2–B3b
Other S-T
investment
7.0 Decreases in
S-T foreign assets
held by residents
Source: Exercise 5, p.244
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Other investment
Item/
Commodity
Debit (B$ million)
Credit (B$ million)
2–B3a
Other
investment
(L-T)
9.0 L-T loans by
non-residents
to residents
2–B 3b Other
investment
(S-T)
9.0 Increases in
S-T foreign
assets held by
residents
Source: Exercise 6, p.244
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Bucksland’s BOP balances
Debit (B$ million)
Credit (B$ million)
1–A Goods and services 10 + 1 0.5 + 7
1–C Current Transfers 0.5
Current Account Balance
CAD = B$8.0 m.
Source: adapted from Table 10.2
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Australia’s current account balance by
component, $A million, 1997–98 to 2003–04
* Includes net current transfers
Source: adapted from Reserve Bank, Bulletin, Table H
-40 000
-35 000
-30 000
-25 000
-20 000
-15 000
-10 000
-5 000
0 19 97
Net goods Net services Net income* CAB
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Australia’s current account deficit as
% of GDP, 1991–2003
-7
-6
-5
-4
-3
-2
-1
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: OECD, Economic Outlook No.76/2004
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Comparative current account balance in
selected economies, $US b., % of GDP
Republic of Korea 12.3 2.0%
Source: based on IMF data (World Bank source for Malaysian GDP)