CHAPTER 2
PAYMENTS AMONG NATIONS
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What’s the Balance of Payment?
• A set of accounts recording all flows of value between a nation’s residents and the residents of the rest of the world during a period of time. • The balance of payments is a statistical statement that systematically summarizes, for a specific period of time, the economic transactions of an economy with the rest of the world. (IMF definition)
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• Capital outflow (debit)

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Transaction 2
• Some Brazilian tourists spend $6 mn in U.S., paying for their hotels and meals through New York bank deposits.
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Principles for Double-Entry
• Credit entries:

Exports of goods and services Capital inflow Income being paid
• Debit entries:
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Six Categories
• • • • • Merchandise trade flows (goods flows) Service flows Income flows Unilateral transfers (gifts) Private capital flows (nonofficial flows of financial assets) • Official reserve asset flows
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A Simple Balance of Payment Account
Flows & Balance Merchandise trade flows Service flows Income flows Unilateral transfers Private capital flows Official reserve asset flows Credit(+) Debit(-)
(19+3)=22 6 15 3 (54+15)=69 6 19 54
Net
-32 6 -15 -3 63 -19 0
Grand balance of credits minus debits
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Six Key Balances
Net surplus or deficit
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Double-entry Bookkeeping
• Each transaction enters the accounts twice: as a credit and a debit of the same value at the same time. • A credit(+) is a flow for which the country is paid. • A debit(-) is a flow for which the country must pay.
Debit(-)
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Transaction 5
• U.S government gives $3 mn in foreign aid to the government of Egypt in the form of wheat.
$ mn Credit(+) Merchandise exports (wheat) Unilateral transfers $3 $3 Debit(-)
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Six Categories
• • • • • Merchandise trade flows (goods flows) Service flows CA Income flows Unilateral transfers (gifts) Private capital flows (nonofficial flows of KA financial assets) OR • Official reserve asset flows
Income payment (interest paid) Private Capital inflow (increase in banks liabilities to foreigners) $15
Debit(-)
$15
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$ mn Credit(+)
Service exports (tourism) $6
Debit(-)
$6
Private capital outflow
(reducing bank’s deposit liability to a foreign residents)
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2. Foreign assets previously obtained -
Bank of Vancouver
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Capital flows
• Capital inflow (credit)


Reduction in an economy’s foreign assets Increase in assets held by foreigners Reduction in foreign liabilities to domestic residents Increase in liabilities to foreigners
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Capital outflow Capital inflow
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Some Concepts (1)
• Trade balance : net balance of trade in goods and services • Current account balance (CA): balance on goods, services, income and gifts • Private capital account balance (KA): net flows of financial assets and similar claims • Overall balance (B) =current account balance + private capital account balance = (negative of) the official reserve balancgovernment sells $19 mn worth of wheat to Russia, being paid with $19mn in gold by the Russian government.
$ mn Credit(+)
Merchandise exports (wheat) Increase in official reserve assets (gold) $19 $19
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Payments through Banking
Importer in U.S.
Bank’s liability
Exporter in Canada
1. Bank’s liability to foreigners +
Bank of New York
2. Assets held by foreigners +
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Payments through Banking
Importer in U.S. Exporter in Canada
Bank’s liability
1. Foreign liability to domestic residents -
Credit(+)
Merchandise imports (natural gas)
Debit(-)
$54
Private capital inflow
$54
(increasing bank’s deposit liability to a foreign residents)
2008 all copy rights reserved.