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Balance of Payments Capital Account Current Account Financial Account Bal. on Goods Bal. on Services Bal. on Income Bal. on Current Transfers Capital Transfers.

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Presentation on theme: "Balance of Payments Capital Account Current Account Financial Account Bal. on Goods Bal. on Services Bal. on Income Bal. on Current Transfers Capital Transfers."— Presentation transcript:

1 Balance of Payments Capital Account Current Account Financial Account Bal. on Goods Bal. on Services Bal. on Income Bal. on Current Transfers Capital Transfers Direct Invest. Portfolio Invest. Other Invest. Reserve Assets

2 Current Account Balance on GOODS: we buy and sell goods internationally. Balance on SERVICES: we buy and sell services such as tourism and insurance. Balance on INCOME: NZers invest overseas to earn income and international investors do the same in NZ. Balance on CURRENT TRANSFERS: examples would include aid payments or pensions paid internationally. The value of Reciepts for Exported GOODS minus Payments for Imported GOODS The value of Reciepts for SERVICES sold minus Payments for SERVICES bought The INCOME earned from NZ investment abroad minus INCOME paid the overseas investment in NZ The value of Reciepts minus Payments back

3 Capital Account This account includes: all transactions that involve the receipt or payment of capital transfers (eg debt forgiveness, transfer of migrants wealth ) the acquisition or disposal of non-produced, non-financial assets (eg patents, copyrights, etc) back

4 Financial Account Net Indirect Investment: private investment that involves taking ownership of 10% or more of a business overseas. Other Investment: trade credits, overseas loans and deposits. Reserve Assets: NZs official overseas reserves (currency) held by the RBNZ or Treasury. Net Portfolio Investment: international investment that takes less than 10% ownership. These are all NET flows, found by deducting the inflow from the outflow back

5 Net Errors and Omissions The combination of the: represents the countrys: Balance of Payments If a country overspends on its Current Account (eg: buys more goods than it sells), it must borrow on its Financial Account to fund this excess spending. Technically, therefore, the Balance of Payments should always be zero. Need to know MORE? Capital Account Current Account Financial Account ++ In practice it is not, so any residual balance is recorded in the Financial Account as:

6 Classifying Trade Transactions Copy the following table and correctly classify the transactions. Some may go into more than one column. Bal on Goods Bal on Service Current Account Financial Account Singapore Air sells tickets on an Auckland/Singapore flight to NZers Air NZ purchases a new aircraft overseas Fonterra sells $30m of milk powder to Africa Fletcher Forests buys 10,000 h of forests in Canada Peter Jacksons film company earns $5m from its investment in a US company The NZ government gives $5m to rebuilding schools in Iraq

7 Calculating Trade Balances Use the following information to calculate the balances asked for: $m Export of Goods Export of Services Import of Goods Import of Services Inflow of Current Transfers Outflow of Current Transfers 957 Income from Foreign Investment Income from Investment Abroad Capital Account Inflow 532 Capital Account Outflow 167 Foreign Investment in NZ NZ Investment Abroad Balance on Goods: Balance on Services: Balance on Income: Balance on Current Transfers: Balance on Current Account: Balance on Capital Account: Balance on Financial Account: $835m $488m -$6782m $496m -$4963m $365m $4096m Given these balances: What is the Balance of Payments? What is the value of Net Errors and Omissions? $502m -$502m

8 Calculating Trade Balances ( the financial account) Use the following information to calculate the balances asked for: $m New Zealand Investment Abroad Direct Investment 269 Portfolio Investment 996 Other Investment Reserve Assets -480 Foreign Investment in New Zealand Direct Investment 618 Portfolio Investment Other Investment Net Direct Investment: Net Portfolio Investment: Balance on Financial Account: a net INFLOW of $349m a net INFLOW of $1393m a net INFLOW of $763m What impact is this balance going to have on other parts of the Balance of Payments?

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10 Inflow Outflow Surplus Deficit Current Account Balance Why should the Balance of Payments always equal zero? If, for example, our spending on imports is greater than our export receipts our Current Account will move into deficit (a net outflow of funds). To pay for our overspending we must borrow, recorded as an inflow on the Financial Account. Financial Account Balance So, in theory at least, whatever happens to the Current Account will be balanced by an opposite change to the Financial Account back


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