1. Unit: The Macroeconomy
Topic: The Balance of Payments

2. Balance of Payments
Definition: A country’s BOP is a record of all the economic transactions between residents of that country and residents in other countries

3. Balance of Payments
Definition: A country’s BOP is a record of all the economic transactions between residents of that country and residents in other countries

4. First – we learned about changes in price level
Order of Learning:
First – we learned about changes in price level
Second – Balance of Payments
Third – Exchange Rates
Why?
Because a change in price level can affect the balance of payments
Which in turn can affect the country’s exchange rate

5. Balance of Payments 3 Accounts – make up the BOP Current Account
Capital Account
Financial Account

6. BOP Accounts Terminology Credit Items Debit Items
Money coming into the country
Positive entries into the account
Debit Items
Money going out of the country
Negative entries into the account

7. BOP Accounts
Flash Quiz Q: For Chinas Balance of Payments. How would we classify the export of 1 Billion RMB worth of chopsticks to Japan?

8. BOP Accounts
Flash Quiz Q: For Chinas Balance of Payments. How would we classify the export of 1 Billion RMB worth of chopsticks to Japan? A: It would be a credit entry. A positive entry in Chinas Balance of Payments.

9. 1. Current Account 4 Parts Trade in Goods Trade in Services Income
Current Transfers
Any items, that are one of the four, will be entered as a credit or a debit in the current account.

10. 1. Current Account Trade in Goods:
Examples: trade of cars, tv’s, clothing
Calculation: revenue from exports m
Other Names: balance of trade, the visible balance, the merchandise balance

11. 1. Current Account Trade in Services
Examples: shipping, tourism, banking, insurance
Calculation: revenue from the export of services less the spending on services imported from other countries
Other Names: Invisible Services

12. 1. Current Account Income Includes: Income in the form of Profits
Interest and dividends earned on direct invesment abroad (Credit)
E.g. Dividends paid on foreign shares If an American owns shares in Alibaba. Credit to USA Balance of Payment
Foreign earnings on investment in the country (Debit)
E.g. Dividend paid to a Chinese person who owns stock of Microsoft. Debit to USA Balance of Payment

13. 1. Current Account Current Transfers Cover:
Payments made and receipts received for which there is no exchange of goods and services. This includes:
Payments to and receipts from international organisations and foreign aid
Transfers by private individuals
E.g. remittance of mone
Mr Durham sends money from China to Canada is a Credit to the BOP of Canada

14. 2. Capital Account Includes: Government debt forgiveness
Money brought into and taken out of the country by migrants
The sale and purchase of intellectual property (copyright, patent and trademark)

15. Balance of Payments Definition
A record of all the transactions that take place between residents of a country and all other countries in the rest of the world.
BOP has 3 Accounts
Current Account
Capital Account
Financial Account

16. Balance of Payments Example – the UK Balance of Payments
A credit (+) is a flow of money in to the UK
A debit (-) is a flow money out of the UK
Note
Every Credit entry is matched by a Debit entry
Example to follow

17. Balance of Payments Example – The UK Balance of Payments
Records the flows of money between residents of the UK and non residents.
Which direction did the money go
How was it paid for

18. Balance of Payments
If a UK resident exports goods abroad – this is a credit (+)
Because Money flowed into the UK
If the foreigner paid for the money with British Pounds – this is a debit (-)
Because it is a decrease in liabilities abroad
Meaning foreigners have less of the British currency

19. Balance of Payments Balancing
Both sides of the transaction are recorded
Both the credit and the debit
The Balance of Payment should balance out
Equal zero
Incomplete Information
Means it doesn’t always balance
Net errors and omissions

20. Balance of Payments The Three Accounts – of Balance of Payment
Current Account
Capital Account
Financial Account

21. Balance of Payments Current Account The current account consists of
Trade in goods
Trade in services
Income
Current transfers

22. Balance of Payments Current Account 1. Trade in Goods
Items that can be touched, weighed or counted as they are traded
Example – The import of cars from Germany to the UK is a debit to the current account of the UK
Example – The export of shoes from the UK to Japan is a credit to the current account of the UK

23. Balance of Payments Current Account 2. Trade in Services
The import and export of services
Example – A UK resident buys a ticket on Air China. Its treated like an imported good – a debit to the UK’s current account
Example – A Chinese company pays a fee to use a UK bank. Treated like an exported good – a credit to the UK’s current account.

24. Balance of Payments Current Account 3. Income
Income from investments abroad
Example – Profit (including dividends) paid on foreign shares help by a UK resident – is a credit in the current account
Example – Interest paid to foreign holders of UK bank accounts – is a debit in current account

25. Balance of Payments Current Account 4. Current Transfers
Made up of Central Government transfers and transfers by private individuals (such as gifts and cash)
Example – A Transfer Payment from the UK to the EU – is a debit in the current account
Example – A UK worker in China sends his salary home – is a credit in the current account

26. Relatively small part of most countries BOP Includes
Balance of Payments
Capital Account
Relatively small part of most countries BOP
Includes
Government debt forgiveness
Money brought in and out of the country by migrants
Sale and purchase of intellectual property (trademarks, copyrights, patents)

27. The purchase or sale of non-financial assets
Balance of Payments
Financial Account
Record transactions which involve the transfer of ownership of fixed assets; and
The purchase or sale of non-financial assets
Example – A UK company constructs a water purification plant abroad– is a debit in the current account
Example – The UK government sells a building it owns in Beijing– is a credit in the current account

28. Balance of Payments Financial Account
Records investment overseas by UK residents
Debit (-) to UK Current Account
Records the inward flow of investment funds by non-UK residents
Credit (+) to the UK Current Account

29. Balance of Payments Look for Trends
Economists look at BOP information over time
Can find trends
So Government can make the right policies
Government policy is Chapter 7

30. Balance of Payments Review
Which is not an argument a Balance of Payments Account
The Total Account
The Capital Account
The Current Account
The Financial Account

31. Balance of Payments Review
If the country is China, a credit is
A flow of money out of China
A flow of money into China
A negative entry in the current account
Either a positive or negative entry in the current account

32. Balance of Payments Review
Both sides of the BOP calculation do not always equal zero, usually because of
The underground economy
Protectionist policies
Imports exceed exports
Incomplete information

33. Balance of Payments Review
The current account consists of
Trade in Goods
Trade in Services
Current Transfers
Income

34. Balance of Payments Review
The export of shoes from the UK to Japan is a credit to the current account of the UK – What kind of entry is it?
Trade in Goods
Trade in Services
Income
Current Transfers

35. Balance of Payments Review
A UK resident buys a ticket on Air China. It is entered in the UK current account as…
A Debit to Trade in Goods
A credit to Trade in Goods
A debit to Trade in Services
A credit to Trade in Services

36. Balance of Payments Review
A Chinese resident earns interest on money he has in a UK. It is entered in the UK current account as
A Debit to Trade in Income
A Credit to Trade in Income
A Debit to Trade in Current Transfers
A Credit to Trade in Current Transfers

37. Balance of Payments Review
German cars are imported into the UK. It is entered in the UK current account as…
A Debit to Trade in Goods
A credit to Trade in Goods
A debit to Trade in Services
A credit to Trade in Services

38. Balance of Payments Review
A British person working in China sends his salary home to the UK every month. It is entered in the UK current account as
A Debit to Trade in Income
A Credit to Trade in Income
A Debit to Trade in Current Transfers
A Credit to Trade in Current Transfers

39. Balance of Payments Review
The British government sells a building that it owns in Beijing. It is entered as…
A Credit to the Current Account of the UK
A Debit to the Current Account of the UK
A Credit to the Capital Account of the UK
A Debit to Current Transfers of the UK

40. Balance of Payments Disequilibria

41. Causes of Current Account Deficit
3 Main Causes
A Growing Domestic Economy
Declining Economic Activity of Trading Partners
Structural Problems

42. Causes of Current Account Deficit
Cause 1 – A Growing Domestic Economy
If Domestic firms are increasing output, they may likely need more raw materials from abroad
Means an increase in imports
Not Considered a Problem
Likely short-term and self correcting: imported raw materials may be used to make goods for export
Foreign investment (credit in financial account) will offset some of the imports (debit in current account)

43. Causes of Current Account Deficit
Cause 2 – Declining Economic Activity of Partners
If economy of trade partners slows, then they will import less
Result is decrease in trade in goods and services
A current account deficit caused by a change in the economic (domestic or foreign) is called a “cyclical deficit.

44. Causes of Current Account Deficit
Cause 2 – Declining Economic Activity of Partners
Not Considered a Problem:
If it is caused by a cyclical deficit
Because it will be short term and self-corrects

45. Causes of Current Account Deficit
Cause 2 – Declining Economic Activity of Partners
Economic Cycle:
"The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other Macroeconomic variables
To put it simply, the business cycle is defined as the real fluctuations in economic activity and gross domestic product (GDP) over a period of time.

46. Causes of Current Account Deficit
Cause 2 – Declining Economic Activity of Partners
Economic Cycle:

47. Causes of Current Account Deficit
Cause 2 – Declining Economic Activity of Partners
Economic Cycle:
The fact that the economy experiences these ups-and-downs in activity should be no surprise. In fact, all modern industrial economies like that of the United States endure considerable swings in economic activity over time.

48. Causes of Current Account Deficit
Cause 2 – Declining Economic Activity of Partners
Economic Cycle:
despite the name, the business cycle is not a regular, predictable, or repeating cycle. Though its phases can be defined, its timing is random and, to a large degree, unpredictable.

49. Causes of Current Account Deficit
Cause 3 – Structural Problems x