4/24/2010

Pham Tuan Anh

August 2008
Hanoi, Vietnam

4/24/2010  2008 by BigBigCat75 1

Goals:
1. Compare the essential differences between The
Current account (CA), The Capital account (KA)
and The Official Settlements Balance Account
(OSB)
2. Understand Balance-of-payment measures
3. Discuss the international flows of goods, services
and capital

4/24/2010  2008 by BigBigCat75 2

Key words:

Export

Import

Capital Inflows

Capital Outflows

Residents

Nonresidents

Goods, Services and Income

Double-entry Accounting
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International transactions:

Diplomat? Patients?

Residents
Foreign soldier?

In Out

Nonresidents Tourist?
Students?
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Balance of payment:

The balance of payment is a record of international
transactions between residents of one country and
the rest of the world

“The balance of payments is a statistical statement
that systematically summarizes, for a specific time
period, the economic transactions of an economy
with the rest of the world” (IMF)

International transactions include exchanges of
goods, services or assets
4/24/2010  2008 by BigBigCat75 5

Double-entry Accounting in the BOP:

All transactions are either debit or credit
transactions

Each credit transaction has a balancing debit
transaction, so the overall balance of payments is
always in balance.

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Double-entry Accounting (Cont’d)

Credit transactions result in receipt of payment
from foreigners:

Merchandise exports (valued f.o.b.)

Transportation and travel receipts

Income received from investments abroad

Gifts received from foreign residents

Aid received from foreign governments

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Double-entry Accounting (Cont’d)

Debit transactions involve to payments to
foreigners:

Merchandise imports

Transportation and travel expenditures

Income paid on investments of foreigners

Gifts to foreign residents

Aid given by home government

Overseas investments by home country
residents
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Overview of BOP

Current Account (all real transfers):

Merchandise trade

Service trade

Transfers

Capital and Financial Account (transfers of
ownership and financial assets and liabilities):

Changes in private assets

Changes in holdings of official international reserves

Statistical Discrepancy
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Overall Balance (with out Statistical Discrepancy)

OB = X – M + Se + Ic + Tr + Ks + Kl + dR

Current
account
(CA) Official
Capital reserves
account account
(KA)
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Current Account list all short-term flows:

Goods and services balance (exports – imports):

Merchandise trade balance (exports – imports)

Services balance (exports – imports)

Net Investment income

Unilateral transfers:

Private transfer payments

Governmental transfers

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What are Services?

Travel and tourism

Trade transportation

Insurance

Education

Financial, technical, and marketing services

Telecommunication

Other professional and consulting services

…
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What is Investment Income?

Payment to holders of foreign financial assets,
including:

Interest on bonds and loans

Dividends and other claims on profits by owners
of foreign businesses

Payments made to temporary (nonresident)
workers

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Unilateral Transfers:

Official government grants in aid to foreign
governments

Charitable giving (e.g., famine relief)

Migrant workers transfers to families in their home
countries

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Capital Account:

The capital and financial account is that balance
of payments account in which all cross-border
transactions involving financial assets are listed.

All purchases or sales of assets, including:

Direct investment

Securities (debt)

Bank claims and liabilities

Official reserves transactions

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Official Reserve Assets:

Early on in this century, this was primarily gold

Now primarily financial assets denominated in a
foreign currency that is widely accepted in
international transactions:

Euro assets (heavily used by U.S.)

Yen assets (heavily used by U.S.)

U.S. dollar assets (key currency worldwide)

Reserve positions in IMF

SDRs (created by IMF)
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Official Reserves Transactions:

Governments can influence exchange rates by
buying and selling official reserves.

The buying and selling of official reserves is
recorded in the “official transactions” account.

It is the part of the balance of payments accounts
that records the amount of its own currency or
foreign currencies that a nation buys or sells.

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Statistical Discrepancy?

It is the net result of errors and omissions on both
the credit and debit sides.

Where do these errors come from?

Under-reporting merchandise imports

Under-reporting investment incomes

Under-reporting capital exports

Basically, people succeed in hiding their imports,
foreign investment incomes, capital flight from their
governments for tax and other purposes.
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Balance of trade and services:

The difference between the import and export of
goods is sometimes called the balance of
merchandise trade.

Although the popular press often uses this
measure, the merchandise trade balance is not a
good summary because services are an important
component of trade.

The balance on goods and services includes trade
in services. This includes visible and invisible trade
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Current Account Surplus and Deficit:

A current account surplus means exports of
goods and services, investment income and
transfers exceed imports and outflows.

A current account deficit means imports of
goods and services, and outflows are greater than
exports and inflows; must be financed by
borrowing (capital account inflows).

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The Balance-of-payment measures:

Basic Balance: consists of current account and
long-term capital flows.

Net Liquidity Balance: measures the change in
private domestic borrowing or lending require to
keep payments equal without adjusting official
reserves.

Official Reserve Transactions Balance:
measures adjustments needed by official reserves

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Domestic Savings, Investment and the KA

National Income (NI) is either spent (C) or saved
(S): NI = C + S (1)

National spending (NS) is divided into personal
spending (C) and investment (I)
NS = C + I (2)

Subtracting (2)–(1)  NI - NS = S - I (3)

If NI >NS and S > I which implies that surplus
capital spent overseas.

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NI, NS, the CA and the KA

A nation which produces more than it spends will
save more than it invests domestically with a net
capital outflow producing a capital account deficit

A nation which spends more than it produces has
a net capital inflow producing a capital account
surplus.

A healthy economy will tend to run a current
account deficit

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The link between the CA and the KA

NI - NS = X - M (4)
where: X = exports
M = imports
X-M=current account balance (CA)

Combining (3) + (4):
S - I = X - M (5)

If S - I = Net Foreign Investment (NFI)
NFI = X - M (6)
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Implications:

If CA is in surplus, the nation must be a net
exporter of capital.

If CA is a deficit, the nation is a major capital
importer.

When NS > NI, the excess must be acquired
through foreign trade.

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Government budgets and the CA deficits:

NS = Chouse-hold + Ihouse-hold + CGovernment
Chouse-hold = NI – Shouse-hold – Tax

 NS = NI – Shouse-hold + Ihouse-hold – Tax + Cgovernment

 NI – NS = Shouse-hold - Ihouse-hold – DeficitGovernment

 CA = Saving Surplus - Government budget deficit

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Solutions for improving CA deficits:

Currency depreciation

Protectionism

Eliminate foreign ownership leading to capital
inflows

Increase Saving (S) relative to domestic
investment (Id)

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Currency depreciation

Depreciations are sometime
Ineffective because it takes time
to affect trade
+

J-Curve Effect states that a
decline in currency value will 0

Initially worsen the deficit

before improvement. _

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4/24/2010  2008 by BigBigCat75

J-Curve Effect in Vietnam???

5000

0
6

8
8

98

99

99

99

99

00

00

00

00

0
D

-5000
1

2
u S
U

-10000
r
Tiệ

Cán cân
-15000

-20000

-25000
Năm
Biểu ñồ cán cân XNK giai ñoạn 1986-2009

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Protectionism:

Trade Barriers used:
1. Tariffs
2. Quotas

Results: most likely will reduce both X and M

Others solutions???

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Eliminate foreign ownership, Increase Saving

 One protectionist solution would place limits on or
eliminate foreign ownership leading to capital
inflows.
 Change the tax regulations and rates to Increase
Saving (S) relative to domestic investment (Id)
 What is SWOT matrices???

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4/24/2010  2008 by BigBigCat75

The CA deficits neither bad nor good inherently:

 Since one country’s exports are another’s
imports, it is not possible for all to run a surplus
 Deficits may be a solution to the problem of
different national propensities to save and invest
 Good signs:
 Investment environment is attractive
 Consumption structure is reasonable: Saving and
Investment
 Investment activities effectively 32
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