The Balance of Payments

Definition Accounting system measuring all economic transactions between the residents of one country and the rest of the world

Categories credits: capital inflows (+) debits: capital outflows (-)

Note By now, the BOP should be …balanced, that is, Current Account + Capital Account + Official Reserve Balance = 0

What if still unbalanced? The Fudge Factor Use an old accounting trick:

Exemplification 1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank. 2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan. 3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank. 4. A Canadian tourist travels to Germany and spends C$0.04 m 5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

Exemplification 1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank. 2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan. 3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank. 4. A Canadian tourist travels to Germany and spends C$0.04 m 5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

Exemplification 1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank. 2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan. 3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank. 4. A Canadian tourist travels to Germany and spends C$0.04 m 5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

Exemplification 1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank. 2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan. 3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank. 4. A Canadian tourist travels to Germany and spends C$0.04 m 5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

Exemplification 1. Canada loans C$ 1 m to Haiti for 10 years by creating a C$ 1 m deposit with a Toronto Bank. 2. A Canadian firm sells $1 m worth of wheat to Haiti. The wheat is paid from the deposit created from the loan. 3. A Canadian receives C$ 0.04 m in interest from the German bonds she owns. The C$0.04 m is deposited in a German bank. 4. A Canadian tourist travels to Germany and spends C$0.04 m 5. Canada gives C$0.8 m worth of humanitarian aid to Somalia.

Everything balances out =