1. Balance of Payments
AP/IB Economics

2. Meet the Costas’

4. Balance of Payments Account
Sum of all the transactions that take place between its residents and the residents of all foreign nations over a period of time.
Credit = $ in (+) Debit = $ out (-)
Current account = goods + services + net income flows
Financial/Capital account = assets
Official reserves account = foreign currencies owned by central banks of nations, used to balance out BoP

5. Current Account Goods = visible trade balance
Services = invisible trade balance
Workpoint 24.1 p. 295
What is an invisible import, a visible import, an invisible export, and a visible export on the UK current account?
UK computer manufacturers buy semi-conductors from Malaysia.
Lloyds of London sells insurance to Chinese shipping companies.
Canadian football fans buy tickets to a Manchester United game.
British football fans attending the World Cup 2010 stay in hotels in South Africa.
France buys North Sea natural gas from UK companies.

6. Current Account
Factor Income = use of factors of production owned by residents of other countries (profit, interest, and dividends from financial investment abroad)
Transfers = net transfers of money that are not as payment for goods or services (foreign aid, grants, remittances, gifts)
CURRENT ACCOUNT =
balance of trade in goods + balance of trade in services + factor income flows +
transfers

7. Net errors and omissions
Financial Account
Net change in foreign ownership of domestic financial assets
Direct investment
Portfolio investment
Reserve assets
Financial account +
Net errors and omissions
Current account

8. Crud… What’s the difference??
CURRENT ACCOUNT
FINANCIAL ACCOUNT
The transactions end
No liability is created
1 and done
Transactions continue
Creates a liability

10. US BoP figures 2007 2008 2009 Exports of goods 1,160,366 1,304,896
1,068,499
Imports of goods
-1,983,558
-2,139,548
-1,575,443
Balance of trade in goods
-823,192
-834,652
-506,944
Exports of services
488,299
534,116
502,298
Imports of services
-367,206
-398,266
-370,262
Balance of trade in services
121,093
135,850
132,036
Income receipts
829,602
796,528
588,203
Income payments
-730,049
-644,554
-466,783
Net income receipts
99,553
151,974
121,420
Unilateral current transfers
-115,548
-122,026
-124,944
Net income flows
-15,995
29,948
-3,524
Current account balance
-718,094
-668,854
-378,432
Capital account transactions
384
6,010
-140
US-owned assets abroad
-1,475,719
156,077
-140,465
Foreign-owned assets in USA
2,107,655
454,722
305,736
Financial derivatives
6,222
-32,947
50,804
Statistical discrepancy
79,552
84,992
162,497
Financial account balance
718,094
668,854
378,432

11. US Trade Surplus and Deficit

13. Simulation Time!
Welcome to Eaststan or Weststan!

14. Consequences of current account deficit
High levels of foreign lending
High levels of foreign investment
Use foreign exchange reserves
Capital account must be in surplus
FOREX reserves: not good long-term solution
Foreign I: property, businesses, stocks. Funds the deficit. Based on foreign confidence in domestic economy, so not considered harmful. Fears that if too much, lose economic sovereignty. Also, if a drop in confidence, foreign investors can pull $, sell assets, resulting in FOREX shifts.
Lending: high rates of interest will have to be paid, a short-term drain on the economy. Result in further increase of current account deficit in future. If lenders quit lending , mass sell-off of currency and FOREX depreciate.
Consequences of current account deficit

15. Consequences of current account deficit
Affects foreign exchange value Capital account must be in surplus
Consequences of current account deficit

16. Consequences of current account deficit
May lead to protectionism Affects foreign exchange value Capital account must be in surplus
Consequences of current account deficit

17. Self-correcting Balance of Trade$  X  M  X  M 
.: XN 
.: XN  $ 

18. Self-correcting Balance of Trade$  X  M  X  M 
.: XN 
.: XN  $ 

19. Ways to correct current account deficit
Government policies to depreciate or devalue the value of the currency
Protectionist measures
Expenditure-switching policies
Depreciate: X become cheaper, M become more expensive
Embargoes, quotas, voluntary export restraints, administrative barriers, tariffs
These can lead to retaliation so gov’ts reluctant to use. Can be against WTO agreements.
Inefficient. Not good long term.
Ways to correct current account deficit

20. Ways to correct current account deficit
Deflationary fiscal policies
Deflationary monetary policies
Expenditure-reducing policies
Expenditure-switching policies
Ways to correct current account deficit

21. Ways to correct current account deficit
Export promotion Expenditure-reducing policies Expenditure-switching policies
Governments actively pursue export promotion because deficit correction sucks.
Ways to correct current account deficit