Chapter 16: Payments among Nations

Credit and Debit Items

BOP accounting is an international application of double entry
bookkeeping
Fig. 16.1
Goods and services balance is also called as merchandise trade
balance; net exports
Statistical Discrepancy: net results of errors and omissions due to
hiding imports, foreign investment incomes, etc.
Countrys current account balance = net foreign investment
(If)-- increase in the countrys foreign financial assets the increase in
the countrys foreign financial liabilities.
Current account surplus: net foreign investment is positive; net lender
to the rest of the world
Current account deficit: net foreign investment is negative; net
borrower from the rest of the world
S = Id + If (domestic real investment and net foreign investment)
If = S - Id Or CA = S Id (current account balance is equal to
national saving that is not invested at home)
A countrys CA is the difference between the domestic
production of goods and services and its total expenditure on
goods and services.
Y = C + Id + G + X M
E = C + Id + G
Y = E + (X M) Domestic product = countrys total expenditures + net
exports. The countrys current account balance is approximately equal
to the difference between domestic product and national spending on
goods and services
CA = X M = Y E
Therefore, CA = If; CA = S Id; CA = Y E
(CA is current
account balance)
If the country wants to reduce its current account deficit, it has to:
(i)
Increase the value of domestic product (Y) relative to the value
of national expenditure (E)
(ii)
National spending must fall to decrease imports or to permit
local production to be exported
Macro meaning of overall balance: the official settlement balance (B)
measures the sum of current account balance plus the private capital
account balance (KA)
B = CA + KA

Because all items in the BOP must sum to 0, any imbalance in the B
(official settlement balance) must be financed (or paid for) through
official reserve flows
B + OR = 0
If overall balance B is surplus it means a debit in the official reserves
account (accumulation of official reserve assets or a decrease in
foreign official reserve holdings)
If overall balance B is deficit it means a credit in the official reserves
account ( a decrease in official reserves assets or an increase in
foreign official reserve holdings)
Int. Investment Position: a statement of the stocks of a nations
international assets and foreign liabilities at a point in time, usually at
the end of a year.
If a country has a current account surplus, it means its If is
positive; country is adding to its holdings of foreign financial
assets or decrease it foreign liabilities and vice versa
A country is a lender when its net stocks of foreign assets is
positive (flows) and a debtor when it is negative (holdings)