1. Chapter 10 The balance of payments

2. 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

3. 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.

4. 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.

5. The standard IMF presentation
Current account
Capital and financial account

6. 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)

7. 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)

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. Bucksland’s BOP balances
Debit
(B$ million)
Credit
1–A Goods and services
10 + 1
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.

16. Australia’s current account balance by component, $A million, 1997–98 to 2003–04
-5 000
Net goods
Net services
Net income*
CAB
* Includes net current transfers
Source: adapted from Reserve Bank, Bulletin, Table H

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

18. 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
-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)