The Balance of Payments
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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
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.
Balance of Payments Account Categories
• Current Accounts
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Merchandise Trade
Service Trade
Services of Capital: Interest Incomes, Dividends
Unilateral Current Transfers
• Capital Accounts
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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
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
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
How does the BOP balance?
Debit(-)
Credit (+)
Exports
100(+)
Imports 120(-)
Current Account Balance
Reduction in US bank
Deposit claims abroad
10
Official Settlement Balance
Reduction in official
reserves
10
Balance of Payments
-20
-10
00
The Current Account Entries
• Merchandise Trade
» Exports (+)
» Imports (-)
• Service Trade
» Exports (+)
» Imports(-)
• Investment Incomes
» Incomes received (+)
» Incomes paid (-)
• Unilateral Transfers
Capital Accounts Entries
• Unofficial Capital Transactions
» Purchase (or sale) of foreign assets
(Direct and indirect)
» Purchase (or sale) of home assets by foreign residents
(Direct and indirect)
• US Official Accounts
• US Assets
» Gold reserves
» FX reserves (deposits)
» SDRs
• Foreign Official Assets in the US (US liabilities)
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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
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
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
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
Foreign Exchange Markets
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Foreign Exchange Markets: A
Flexible Rate System
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