Chapter 10 The balance of payments

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

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.

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.

The standard IMF presentation Current account Capital and financial account

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)

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)

Capital and financial account cont. (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

10.0 Decreases in S-T foreign Imports of goods Item/ Commodity Debit (B$ million) Credit 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

Imports of services Item/ Commodity Debit (B$ million ) Credit 1–A21 Transportation services 1.0 Payments for freight 2–B3b Other S-T investment 1.0 Decrease in S-T foreign assets held by residents Source: Exercise 2, p.243

Investment income Item No/Name Debit (B$ million) Credit 1–B2 Investment income 4.0 Profits of FDI in Bucksland 2–B1 Direct investment 2.0 Increased investment in enterprises 2–B3b Other S-T 2.0 Decreases in S-T domestic liabilities Source: Exercise 3, p.243

Current transfers Item/ Commodity Debit (B$ million) Credit 1–C1 Current transfers 0.5 Payment in kind to non- residents 1–A1 Goods 0.5 Food exports Source: Exercise 4, p.244

Direct investment Item No/ Name Debit (B$ million) Credit 2–B1 Direct 14.0 Increased investment in foreign enterprises 1–A1 Goods 7.0 Exports to non- resident destinations 2–B3b Other S-T investment 7.0 Decreases in S-T foreign assets held by residents Source: Exercise 5, p.244

Other investment Item/ Commodity Debit (B$ million) Credit 2–B3a (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

Bucksland’s BOP balances Debit (B$ million) Credit 1–A Goods and services 10 + 1 0.5 + 7 Balance on G & S 11 7.5 1–B Income 4 Balance on G&S & income 15 1–C Current Transfers 0.5 Current Account Balance (1A + 1B + 1C) 15.5 Source: adapted from Table 10.2 CAD = B$8.0 m.

Australia’s current account balance by component, $A million, 1997–98 to 2003–04 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 -5 000 -10 000 Net goods -15 000 Net services -20 000 Net income* -25 000 CAB -30 000 * Includes net current transfers -35 000 -40 000 Source: adapted from Reserve Bank, Bulletin, Table H

Australia’s current account deficit as % of GDP, 1991–2003 Source: OECD, Economic Outlook No.76/2004

Comparative current account balance in selected economies, $US b Comparative current account balance in selected economies, $US b., % of GDP Economy $US billion % of GDP US - 530.7 -4.8% Japan 136.2 3.2% Australia - 30.2 - 5.9% New Zealand - 3.3 -4.2% China 45.9 H. Kong, China 16.7 10.7% Singapore 28.2 30.9% Republic of Korea 12.3 2.0% Malaysia 13.3 12.9% Source: based on IMF data (World Bank source for Malaysian GDP)