1. Chapter 10: The Balance of Payments $A $US ¥ $A Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea € Current Account DeficitCurrent Account Surplus

2. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea TOPIC PLAN – Definition of the balance of payments – The IMF standard presentation – The current account – The capital and the financial account – The double entry system. Examples of records – Australia’s Balance of Payments

3. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea 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. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea The Balance of Payments (BOP) Double-entry book-keeping system For nations with floating currencies,the entire balance of payments by definition must numerically balance, while individual accounts or sub-accounts may not balance.

5. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea The Standard I.M.F. Presentation Current Account Capital and Financial Account

6. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea 1.Current Account International transactions involving goods and/or services, income and current transfers. Main items: A.Goods and Services – a.Goods(5 items) – b.Services(11 items) B.Income – Compensation of employees – Investment income(e.g.FDI Profits,other) C.Current transfers(Payments in cash and kind by residents to non-residents)

7. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea 2.Capital & Financial Account The country's transactions in monetary and ownership claims. A.Capital account, e.g. 1.Capital transfers (e.g.involving transfers of ownership of fixed assets); General Government and Other 2.Acquisition/disposal of non-produced, non- financial assets (e.g. intangibles,such as patented entities,leases,goodwill )

8. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea 2.Capital &Financial Account B. Financial Account – 1.Direct investment – 2.Portfolio investment – 3.Other investment (e.g. trade credits, loans, currency & deposits, other) – 4.Reserve assets Net Errors and Omissions

9. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Import Records (Oil:$10m) ITEMSDEBIT ($m) CREDIT ($m) __________________________________________ 1A1 Goods10 Oil imports --------------------------------------------------------------- 2B3b Other inv. 10 decreases in S-T foreign assets held by residents. ________________________________________

10. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Shipment Records ($1m) ITEMS DEBIT (B$m) CREDIT (B$m) ______________________________________ 1A21 Transportation 1 Payments for freight --------------------------------------------------------------------- 2B3b Other investment1 decrease in short term S-T foreign assets held by residents

11. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea INVESTMENT INCOME RECORDS (B$ 4 m.,50 % reinvested) ITEMS DEBIT (B$m) CREDIT (B$m) 1B2 Investment income 4 profits from FDI in Bucksland 2B1Direct investment 2 increases in FDI in Bucksland firms 2B3b Other S-T capital 2 decreases in S-T Bucksland liabilities to non- Residents.

12. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Current Transfers Records (B$ 0.5 m. Food aid) ITEMSDEBIT (B$m) CREDIT (B$m) __________________________________________ 1C 1 Current0.5 Payment transfers in kind to N-R’s ---------------------------------------------------------------- 1A 1 Goods 0.5 Food exports __________________________________________

13. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Direct Investment Records ($14m with 50%equipment+50% cash) ITEMS DEBIT ($m) CREDIT ($m) ______________________________________ 2B1 Direct Investment 14 increased FDI in foreign copies ---------------------------------------------------------------------- 1A1 Goods 7 Eqt exports 2B3b Other S-T 7 Decrease in S-T foreign assets held by Residents ----------------------------------------------------------------------

14. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Barclays Bank loaned $9 m. to a bank in Bucksland ITEMS DEBIT ($m) CREDIT ($m) ________________________________ 2B3a Other investment (L-T) 9M. L-T loans by non-residents to residents 2B3b Other investment (S-T) 9 M. Increases in S-T fforeign assets held by residents

15. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Bucksland’s BOP balances Debit Credit 1-A.Goods and Services 10 + 10.5 + 7 --------------------------------------------------------------- Balance on G & S:117.5 --------------------------------------------------------------- 1-B Income 4 --------------------------------------------------------------- Balance on G&S &Income 157.5 - ----------------------------------------------------------- 1-C Current Transfers 0.5 --------------------------------------------------------------- Current Account Balance15.57.5 (1A + 1B + 1C)CAD = $ 8.0 m ----------------------------------------------------------------

16. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Australia’s Current Account, June 1996-June 2001,Quarterly,A$ m. Source: Based on R.B.A

17. Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Australia’s Current Account Deficit as a % of GDP