Unit 2 Balance of Payments

I. Definition of Balance of Payments Balance of Payments (BOP) refers to a system of government accounts that records and catalogs a country’s exports and imports as well as the flow of capital and gifts between the residents of the country and residents of other countries during a specific time interval.

II. Two Principles of BOP Natural Person A. Residents Legal Person (Enterprises & Public Agencies) e.g. For an MNC, such as General Motor (GM) for China’s BOP: Parent in America Subsidiary in China so, foreign resident regarded as China’s residents

Residents of US tourist military personnel diplomatic personnel temporary migrant

Note: “Hence, sales by a parent firm to a foreign subsidiary result in balance of payments entries, even though the transaction takes place within a single corporation.”

B. Double-Entry System ( 复式记帐法） Each transaction gives rise to both a credit entry ( 贷记 ) and debit entry ( 借记） of BOP in different countries. Credit Debit Inflow of capital + - Outflow of capital i) All transactions involving payments from foreigners to a country are entered in BOP “receipts” column with a plus signal (+) to reflect that they are credits, which results in inflow of funds to the country. ii) All payments to foreigners are entered in the “payments” column with a minus signal (-) to reflect that they are debits because they result in outflows of funds to other countries.

III. Important Sections of BOP

A. Current Account ( 经常项目帐户） i) Merchandise-Imports & Exports tangible goods ( 有形商品） ii) Services （服务） - intangible goods （无形商品） transportation 运输 tourism 旅游 insurance 保险 communication 通讯 e.g. cost CIF insurance Based on the requirements of BOP, these two parts are put into “Services”. freight iii) Unilateral Transfer ( 单方面转移、无偿转移） Government aids 得到 “+” ， 支出 “-” Remittance from repatriation 汇入 “+” ， 汇出 “-” Net Current Account Balance

Note ：经常项目差额（主动获得外汇的多 少），如果此项为正，国家处于主动地位； 如果此项为负，国家需要用其他项目弥补， 处境较被动。

B. Capital Account ( 资本帐户） i) Direct Investment ( 直接投资 / 利润 ) Long-term Capital ( 长期资本） ii) Portfolio Investment ( 证券投资 / 股息、红利） iii) Short-term Capital ( 短期资本） Net Capital Account Balance

C. Official Reserve Account ( 官方贮备帐户） i) Gold ii) Foreign Exchange iii) SDRs ( 特别提款权） （ Position in IMF - 在 IMF 的贮备头寸） Net Official Reserve (Note: Special Drawing Rights (SDRs) are issued to governments by international monetary funds (IMF) to settle international debts and have replaced gold in international financial transaction.) gold 25% SDRs foreign exchange domestic currency 75% SDRs 相当于股份公司，每个国家购买一定的份额（ Share), 此财产属于基 金组织财产，存于本国中央银行，待 IMF 需要时动用。现在，美国占有份 额的 17.47% ，居首位，中国占有份额的 2.99% ，居第八位。

经常项目顺差 + 资本与金融项目顺差 官方储备增加 （中国情况） 经常项目顺差 > 资本与金融项目逆差 官方储备增加 经常项目逆差 < 资本与金融项目顺差 官方储备增加 （美国情况） 经常项目逆差 + 资本与金融项目逆差 官方储备减少 经常项目逆差 > 资本与金融项目顺差 官方储备减少 经常项目顺差 < 资本与金融项目逆差 官方储备减少

D.Errors and Omissions ( 净错误和遗漏） The establishment of this account is to fill the gap on the bookkeeping artificially. Theoretically, Current Account+Capital Account = Official Reserves Practically, Current Account+Capital Account = Official Reserves (Due to incomplete figures and smuggling.)

F. Comparative Analysis Methods a) Horizontal Analysis: Compare BOP with other countries’ BOPs. b) Vertical Analysis: Compare BOP with your own BOPs Before.

IV. Analysis Implications ( Equilibrium of BOP )

A. Implications of favorable BOP & unfavorable BOP a) It refers to trade equilibrium, which means that exports equal imports. If exports exceed imports, trade surplus will appear. And if exports are less than imports, trade deficits will appear. b) The second implication is current account’s equilibrium. If trade item runs a deficit, the invisible trade item can make it up, and if it can not, capital account will be used to cover deficits. c) Finally, if it still not, the governments have to draw on their foreign reserves assets, which should be use as the last resort to cover deficits.

B. Implications for Managers a) A country experiencing serious balance of payments deficits is not likely to import as much as it would if it were running a surplus. b) Continuing deficits in a country’s BOP may signal future controls on the outflow capital movements. c) A continuing surplus in a country’s BOP may indicate a strong international competitive position.