1. The Balance of Payments
What is the Balance of Payments?
The structure of the balance of payments
What are the BOP accounts?
The BOP Recording Method: Double-Entry Bookkeeping Method
Balance of Payments Balances
The Balance of Payments and the FX Market

2. Balance of Payments
The balance of payments is an accounting listing (tabulation) of the values of economic (trade and financial) transactions between the residents of a (home) country and residents of other countries.
Balance of payments entries are recorded based on the double-entry bookkeeping principle.
The balance of payments entries are always balanced; the entries add up to zero.

3. Balance of Payments Account Categories
Current Accounts
Merchandise Trade
Service Trade
Services of Capital: Interest Incomes, Dividends
Unilateral Current Transfers
Capital Accounts
US private investments abroad
Foreign private investments in the US
Other investments/capital transactions
Errors and statistical discrepancies
Official (Capital) Accounts
(Changes in) US official reserve assets abroad: gold, SDRs, foreign currencies
(Changes in) foreign official assets in the US

4. Double-Entry Principle
Each transaction affects at least two account
Debit entries balance credit entries
Imports are debit entries ( Autonomous transactions)
The balancing (credit) entry(ies) for an import take(s) place in one (or more) sections of capital the accounts (Accommodating transactions)
Exports are credit entries ( Autonomous transactions)
The balancing (debit) entry(ies) for an export take(s) place in one (or more) sections of the capital accounts (Accommodating transactions)
Capital inflows (increases in foreign assents) are credit entries
Capital outflows (increases in US residents-owned assets abroad) are debit entries
Increases in US claims against residents of other countries are debit entries
Increases in foreign residents’ claims against US are credit entries

5. Balance of Payments Balances
Balance of Merchandise Trade
Balance Merchandise and Services
Current Account Balance
Capital Account Balances
Official Settlement Balance
Statistical errors
Overall Balance = 0

6. How does the BOP balance?
Debit(-) Credit (+)
Exports (+)
Imports (-)
Current Account Balance
Reduction in US bank
Deposit claims abroad
Official Settlement Balance
Reduction in official
reserves
Balance of Payments

7. The Current Account Entries
Merchandise Trade
Exports (+)
Imports (-)
Service Trade
Imports(-)
Investment Incomes
Incomes received (+)
Incomes paid (-)
Unilateral Transfers

8. Capital Accounts Entries
Unofficial Capital Transactions
Purchase (or sale) of foreign assets
(Direct and indirect)
Purchase (or sale) of home assets by foreign residents
US Official Accounts
US Assets
Gold reserves
FX reserves (deposits)
SDRs
Foreign Official Assets in the US (US liabilities)
US government securities held by foreign officials
US Treasury bills held by foreign officials
Other foreign official assets in the US
Other liabilities to foreign official

9. BOP Deficits and Surpluses
Current Balance + Capital Balance+ Official Settlement Balance + Statistical discrepancies = 0
Balance of Merchandise Trade
Balance of Merchandise and Service Trade
Current Balance
Capital Balances
Current Balance + Capital Balance + Statistical discrepancies = BOP
BOP = Official Settlement Balance

10. BOP &Foreign Exchange Markets
Given that each nation state has its own currency (with which domestic transactions are carried out), all international transactions potentially generate either supply of or demand for foreign exchange.
Generally, transactions resulting in debit entries in the BOP generate demand for FX(e.g., imports, investments abroad); transaction resulting in credit entries generate demand(e.g., exports, foreign investments in the US)
Foreign exchange markets are places, systems, or mechanisms through which currencies are exchanged or traded.
Overall (multilateral) BOP accounts and bilateral BOP accounts

11. A balanced set of transactions
A balanced set of transactions does affect the official settlement balance:
An import finance by the seller
A foreign investment investment financed by an American bank holding FX deposits in a foreign bank

12. Foreign Exchange Markets$ S e1 eo e2 D
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Yen

13. Foreign Exchange Markets: A Flexible Rate System$ S e1
At parity : (i$ - iY) = p
(i$ - iY) = ( ee-e)/e eo e2 D
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