Chapter Three The Balance of Payments Chapter Objective: Chapter Objective: This chapter serves to introduce the student to the balance of payments. How it is constructed and how balance of payments data may be interpreted. This chapter serves to introduce the student to the balance of payments. How it is constructed and how balance of payments data may be interpreted

Chapter Three Outline Balance of Payments Accounting Balance of Payments Accounting Balance of Payments Accounts Balance of Payments Accounts –The Current Account –The Capital and Financial Account –Statistical Discrepancy –Official Reserves Account The Balance of Payments Identity The Balance of Payments Identity Balance of Payments Trends in Major Countries Balance of Payments Trends in Major Countries

Balance of Payments Accounting The Balance of Payments is the statistical record of all transactions between domestic and foreign residents over a certain period of time in the form of double-entry bookkeeping. The Balance of Payments is the statistical record of all transactions between domestic and foreign residents over a certain period of time in the form of double-entry bookkeeping. N.B. what are we referring to when we say “ residents ” ?

4 Balance of Payment Accounts The BOP accounts are composed of the following The BOP accounts are composed of the following (as defined in the fifth edition of IMF’s Balance of Payments Manual) (as defined in the fifth edition of IMF’s Balance of Payments Manual) –The Current Account –The Capital and Financial Account –Statistical Discrepancy –The Official Reserves Account

The Current Account all imports and exports of goods and services. all imports and exports of goods and services. income receipts income receipts unilateral transfers of foreign aid. unilateral transfers of foreign aid. Balance on Current Account (BCA) If the debits exceed the credits, then a country is running a current deficit. Balance on Current Account (BCA) If the debits exceed the credits, then a country is running a current deficit

6 Balance of Payment(2) Capital Account (as defined in the 1993 system of National Accounts and the fifth edition of IMF’s BOP Manual) (as defined in the 1993 system of National Accounts and the fifth edition of IMF’s BOP Manual) The new capital account includes unilateral current transfers that are really shifts in assets, not current income. E.g. debt forgiveness, transfers by immigrants, the sale or purchases of rights to natural resources or patents. The new capital account includes unilateral current transfers that are really shifts in assets, not current income. E.g. debt forgiveness, transfers by immigrants, the sale or purchases of rights to natural resources or patents.

Balance of Payment (3) Financial Account The financial account (which was called the capital account previously) summarized the flow of funds resulting from the sale of assets between one specified country and all other countries. The financial account (which was called the capital account previously) summarized the flow of funds resulting from the sale of assets between one specified country and all other countries. Assets including Assets including –direct foreign investment – investments in securities – other investment assets. BFA: financial account balance BFA: financial account balance BFA =Financial inflows-Financial outflow BFA =Financial inflows-Financial outflow

Balance of Payment(4) Changes in official Reserves Account Why holding official reserves? Why holding official reserves? –For finance the overall balance –For foreign exchange market intervention What are in the official reserve accounts held by central banks? (P67, exhibit 3.3) What are in the official reserve accounts held by central banks? (P67, exhibit 3.3) –Foreign currencies, gold, SDRs and Reserves positions in IMF Net changes of official assets (BRA) reflect the foreign exchange market intervention. Net changes of official assets (BRA) reflect the foreign exchange market intervention. When overall balance ＞ 0, official reserve increase, BRA<0 When overall balance ＞ 0, official reserve increase, BRA<0 When overall balance 0, When overall balance 0,

The Valuation of SDR currencyUnits of each currency in the SDR Exchange rate(April 28, 2000) U.S. dollar Equivalent Euro0.3519$0.9062/euro$ Yen27.2 ￥ /$ $ British pound $1.5681/ ￡ $ U.S.dollar0.5821$ TotalNote:fixed with 5 years Note: change$

Balance of payments(5)Errors and omissions or Statistical Discrepancy (SD) If all the cross-border transactions are accurately recorded by the government, then the sum of all items in the four accounts must be zero. That is, If all the cross-border transactions are accurately recorded by the government, then the sum of all items in the four accounts must be zero. That is, (BCA+BKA+BFA+BRA)=0 (BCA+BKA+BFA+BRA)=0 However, there may be some errors and omissions. E.g. many items are estimates. Some cross-border transaction such as illegal drug trade are not reported by the government. To account for statistical Discrepancy (SD), a artificial item called net errors and omissions or SD is needed. However, there may be some errors and omissions. E.g. many items are estimates. Some cross-border transaction such as illegal drug trade are not reported by the government. To account for statistical Discrepancy (SD), a artificial item called net errors and omissions or SD is needed. Statistical Discrepancy is defined as the sum of items in all accounts with sign reversed, that is, Statistical Discrepancy is defined as the sum of items in all accounts with sign reversed, that is, SD=-(BCA+BKA+BFA+BRA) SD=-(BCA+BKA+BFA+BRA) The balance of payments account will always balance because of this item: The balance of payments account will always balance because of this item: BCA+BKA+BFA+BRA+SD ≡ 0 BCA+BKA+BFA+BRA+SD ≡ 0

China’s Balance of payment in 2004 （ thousand dollars ） BCA BCA BKA － BKA － BFA BFA BRA － BRA － Errors and Omissions （ SD ） Errors and Omissions （ SD ）

–A country running a current account deficit can pay for it by running a capital account surplus or it can draw down its foreign exchange reserves (previously accumulated foreign wealth).

Balance of Payments Trends Since 1982 the U.S. has experienced continuous deficits on the current account and continuous surpluses on the capital account. Since 1982 the U.S. has experienced continuous deficits on the current account and continuous surpluses on the capital account. During the same period, Japan has experienced the opposite. During the same period, Japan has experienced the opposite

Balance of Payments Trends

Balance of Payments Trends

Balance of Payments Trends

思考题： – 上述四国的国际收支新趋势（完成图表） – 双顺差模式是否在其他国家经济起飞时也出现过 ？这种模式在中国是否会长期持续下去？ – 美国的经常项目赤字与其国际储备货币地位有什 么关系？