chapter 4. balance of payment
chapter 4. balance of payment
2
Examples About International Transactions
cash
the U.S. bicycle frames China
3
Examples About International Transactions
4
Balance of Payments Accounting
Cash inflows will be recorded as credits with “+”
sign, implying a demand of domestic currency.
Cash outflows will be recorded as debits with “-”
sign, implying a supply of domestic currency.
cash
Country A Commodity or asset country B
5
Balance of Payments Accounting
Applied to the Two Examples
In the first example, company A in the U.S.
importing $100,000 worth of bicycle frames
from Company B in China:
This transaction results in a $100,000 debit
6
Balance of Payments Accounting
Applied to the Two Examples
In the second example, the Chinese government
purchasing $100,000,000 worth of U.S. treasury
bonds:
This transaction results in a $100,000,000 credit
7
Balance of Payments Accounting:
Principle of double-entry bookkeeping
The BOP record of a country’s international
transactions over a certain period of time is kept in
a way that accords with the principle of double-
entry bookkeeping.
Double-entry bookkeeping: every credit (debit) in the
balance of payments account in one country is matched
by a debit (credit) in the balance of payments account
in another country
“A country” here refers the government and
citizens of the country, as well as companies
controlled by the citizens of the country
8
U.S. Balance of Payments Data in 2022
(in Billion Dollars)
Credits Debits
Current Account
1 Exports $4,409.5
2 Imports -$5,353.3
3 Unilateral Transfers $9.1 -$13.8
Balance on Current Account -$948.5
Capital Account
4 Direct Investment $351.6 -$435.8
5 Portfolio Investment $756.8 -$437.8
6 Other Investments $407.4 -$40.3
Balance on Capital Account $602.2
7 Statistical Discrepancies $271.4
Overall Balance -$74.9
Official Reserve Account $74.9
9
Balance of Payments Accounts
The balance of payments (BOP) are composed of
the following:
The Current Account
The Capital Account
Statistical Discrepancy
The Official Reserves Account
10
The Current Account
The current account is composed of
Exports and imports of merchandises, i.e., tangible
goods, such as oil, wheat, clothes, computers, and so on
Exports and imports of services, such as consulting,
royalties for patents, shipping fees, tourist expenditure,
and so on
11
US Balance of Payment Data:
the Current Account
Credits Debits
Current Account
1 Exports $4,409.5
In 2022, the
2 Imports -$5,353.3
U.S. imported
3 Unilateral Transfers $9.1 -$13.8 more than it
Balance on Current Account -$948.5 exported, thus
Capital Account
4 Direct Investment $351.6 -$435.8 running a
5 Portfolio Investment $756.8 -$437.8 current account
6 Other Investments $407.4 -$40.3
Balance on Capital Account $602.2
deficit of
7 Statistical Discrepancies $271.4 $948.5 billion.
Overall Balance -$74.9
Official Reserve Account $74.9
12
Trade Deficit vs. Trade Surplus
If the debits exceed the credits in the current account, a
country is running a trade deficit, representing a reduction
in the country’s net wealth
If the credits exceed the debits in the current account, a
country is running a trade surplus, representing an
increase in the country’s net wealth
A country finances its current account deficits by running
capital account surpluses (or by drawing down its official
reserve assets).
13
World Trade Deficits and Surpluses in 2019
Direct Investment
Portfolio investments
15
The Capital Account, Direct Investment
Direct investment occurs when investors builds a
new business in foreign countries, or acquire a
measure of control of foreign business
For example, when Honda built an assembly
16
The Capital Account, Portfolio Investments
Portfolio investments refer to sales and purchases
of foreign financial assets such as stocks, bonds
and options that do not involve a transfer of
control
For example, when a Chinese company purchased
18
Statistical Discrepancy
and Overall Balance
Statistical discrepancy represents omissions and
mis-recorded transactions
The Table in last slide shows a statistical discrepancy of
+$271.4 billion in the U.S. BOP account in 2022.
The overall balance represents the cumulative
balance of payments (BOP) including the current
account and capital account, corrected by the
statistical discrepancy.
A country is running BOP deficit (surplus) if the overall
balance is negative (positive).
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Statistical Discrepancy
Credits Debits
Current Account
1 Exports $4,409.5 In 2022, the
2 Imports -$5,353.3 U.S. BOP
3 Unilateral Transfers $9.1 -$13.8 data are
Balance on Current Account -$948.5
Capital Account subject to a
4 Direct Investment $351.6 -$435.8 statistical
5
6
Portfolio Investment
Other Investments
$756.8
$407.4
-$437.8
-$40.3
discrepancy
Balance on Capital Account $602.2 of +$271.4
7 Statistical Discrepancies
Overall Balance
$271.4
-$74.9
billion
Official Reserve Account $74.9
20
The Overall Balance
Credits Debits In 2022, the
Current Account
1 Exports $4,409.5
U.S. was
2 Imports -$5,353.3
running a
3 Unilateral Transfers $9.1 -$13.8 BOP deficit
Balance on Current Account -$948.5 with the
Capital Account
4 Direct Investment $351.6 -$435.8
overall
5 Portfolio Investment $756.8 -$437.8 balance being
6 Other Investments $407.4 -$40.3
Balance on Capital Account $602.2
-$74.9
7 Statistical Discrepancies $271.4 billion :-
Overall Balance -$74.9
Official Reserve Account $74.9
$948.5 +
$602.2 +
21 $271.4 = -
Balance of Payments and the
Exchange Rate
Credits Debits Exchange rate $
Current Account
1 Exports $4,409.5 P S
2 Imports -$5,353.3
3 Unilateral Transfers $9.1 -$13.8
Balance on Current Account -$948.5
Capital Account
4 Direct Investment $351.6 -$435.8
5 Portfolio Investment $756.8 -$437.8
6 Other Investments $407.4 -$40.3 D
Balance on Capital Account $602.2
7 Statistical Discrepancies $271.4
Overall Balance -$74.9 Q
Official Reserve Account $74.9
26
U.S. Balance of Payments:
the Official Reserve Account
Credits Debits
Current Account Although the
1 Exports $4,409.5 U.S. allows its
2 Imports -$5,353.3 currency to “float
3 Unilateral Transfers $9.1 -$13.8 independently”
Balance on Current Account -$948.5
Capital Account against other
4 Direct Investment $351.6 -$435.8 currencies, the
5 Portfolio Investment $756.8 -$437.8 U.S. government
6 Other Investments $407.4 -$40.3
Balance on Capital Account $602.2
still maintains
7 Statistical Discrepancies $271.4 nonzero, albeit
Overall Balance -$74.9 small, official
Official Reserve Account $74.9
reserve account
27
The Official Reserve Account
If a government wants to intervene in the FX market,
first it has to keep an official reserve account:
The official reserve account is used to accommodate a
country’s international payment gap indicated by the overall
balance
In 2022, the U.S. decreased its official reserve holdings
by $74.9 billion to take care of the BOP deficit of the
same amount.
By decreasing its reserve holdings, the U.S. generated
cash inflows which will be recorded as credit with
positive sign in its reserve account.
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Government Intervention
Credits Debits
Current Account Exchange rate $
1 Exports $4,409.5
P S
2 Imports -$5,353.3
3 Unilateral Transfers $9.1 -$13.8
Balance on Current Account -$948.5
Capital Account
4 Direct Investment $351.6 -$435.8 D’
5 Portfolio Investment $756.8 -$437.8
6 Other Investments
Balance on Capital Account
$407.4 -$40.3 D
$602.2
7 Statistical Discrepancies $271.4
Overall Balance -$74.9 Q
Official Reserve Account $74.9
By increasing the demand of dollar, the U.S. government prevents dollar from an
29 immediate depreciation.
Government Intervention
Credits Debits
Current Account In the U.S.
1 Exports $4,409.5 Balance of
2 Imports -$5,353.3 Payment Data
3 Unilateral Transfers
Balance on Current Account
$9.1 -$13.8 in 2022, we
-$948.5
Capital Account verify that
4 Direct Investment $351.6 -$435.8 -BRA= -
5 Portfolio Investment $756.8 -$437.8
6 Other Investments $407.4 -$40.3 $74.9 =
Balance on Capital Account $602.2 Overall
7 Statistical Discrepancies $271.4
Overall Balance -$74.9 Balance =
Official Reserve Account $74.9 BCA + BKA
30
The Balance of Payments Identity
Take into account the government intervention, the BOP
identity is written as BCA + BKA + BRA = 0
where
BCA = balance on current account
BKA = balance on capital account
BRA = balance on the reserves account
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The Official Reserve Assets
Gold was the predominant international reserve
asset before 1945
After 1945, international reserve asset comprises:
Gold
Foreign exchange
Special drawing rights (SDRs)
Reserve positions in the International Monetary Fund
(IMF)
34
The Foreign Exchange Reserves
Currency Composition of the World’s Foreign Exchange Reserves
(Percent of Total)
Currency 2006 2008 2010 2012 2014 2016 2018 2020 2022
U.S. dollar 65.0 63.8 62.2 61.5 65.2 65.4 61.7 59.0 58.4
Euro 25.0 26.2 25.8 24.1 21.2 19.7 20.7 21.2 20.5
Chinese yuan - - - - - 1.07 1.89 2.25 2.69
JP yen 3.46 3.47 3.66 4.09 3.55 3.96 5.20 6.03 5.51
British pound 4.52 4.22 3.94 4.04 3.70 4.34 4.42 4.69 4.95
Australian dollar - - - 1.46 1.60 1.69 1.62 1.82 1.96
Canadian dollar - - - 1.43 1.75 1.94 1.84 2.07 2.38
Source: International Monetary Fund
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Questions about Central Bank Reserve
Diversification
Do you think that central banks should diversify their
official reserves among assets denominated in different
currencies? Why? If yes, what would be the practical
difficulties?
What would be the effects of official reserve diversification
on the U.S. treasury bonds?
Do you think that central banks should diversify their
official reserves among different types of assets, even
though they are still denominated in dollars? Why? If yes,
what would be the potential problems?
36
Balances on the Current (BCA) and Capital
(BKA) Accounts of the United States
41