I. The BALANCE OF PAYMENTS
1. Definition & traits
* The Balance of Payments (BOP) records, on an annual basis, all the transactions in goods & services, in monetary, financial & real assets between a country and the rest of the world.
* The BOP is part of the national accounts which records payments to and receiptes from the rest of the world on an annual basis
* BOP enable to assess & measure the involvement of a country in the world economy
* BOP is prepared as a balance sheet, recorded by double-entry accounting principles
* BOP based on double-entry bookeeping: every transaction is entered on both sides of the balance sheet, as a credit & a debit.
* Credit ...view middle of the document...
The Capital & Financial Transactions Account (CFTA) consists of Longterm and Shorterm private capital flows
* Longterm Private Capital Flows includes
* Foreign Direct Investment, recording transactions in Real Assets of land, real estates, office, building, resorts and in Equity of financial Assets
* Portfolio Investment, recording Equity Flows, Bond Flows and longterm Bank Debt
* Shortterm Private Capital Flows, recording transactions Monetary Assets in Treasury Bill, Certificate of Deposit, Commercial Paper, Interbank Deposit
c. The Official Reserve Transactions (ORT) records
* Changes in Foreign Central Bank's holdings of Domestic Currency
* Changes in Domestic Central Bank's holdings of Gold & Foreign Exchange Reserves (USD, EUR, JPY, SDR)
* As the BOP is a balance sheet, we can write:
The Current Account Balance + The Capital & Financial Transactions Account + The Official Reserve Transactions = 0
d. Sometimes the 4th item of BOP is Error & Omission
* Maybe 1% of GDP
* Accociated with Black Market, unofficial transactions
3. Comments/ Interpreting the BOP
* The Overall BOP is always in equilibrium
* The Current Account Balance (mainly shaped by Trade Balance) is counterbalanced by the Capital & Financial Transaction Account (plus gains or losses of Official Reserves Transaction)
* Capital & Financial Transaction Account may play leading role & the Trade Balance adjusts this situation (eg: USA today)
4. Dutch Desease of BOP:
* At first, Capital & Financial Transaction Account become very good with huge surplus, huge inlow of foreign capital.
* BOP can have negative Current Account Balance, with huge imports, & that nation lives on credit from the rest of the world.
* Afterthat, when world financial crisis incurs, most of Foreigners and MNCs simultaneously withdral capital => the country has to experience paintful process and longtime to wake up.
5. Framework of Simple Macro-economic Equilibrium Model (SMEM)
* Definition: The Current Account of the BOP mirrors various internal Desequilibria of a national economy (mirror of what happen inside the country
* Y: national income or GNP C: aggregate consumption
* I: aggregate investment S: Savings
* G: Puplic expenditures T: Taxes
* X: Exports M: Imports
* Equation: Aggregate spending = aggregate resource of the country
* Y = C + S + T + M
* Y = C + I + G + X
* C + I + G + X = C + S + T + M
* ( I – S ) + ( G – T ) = M – X
* The gap between national Private Savings and Investment and/or the Public Deficit (surplus) equal the Trade Balance (deficit or surplus)
* Framework of Simple Macro-economic Equilibrium Model (SMEM) enables to assess the consequences of its commercial and financial openess and of various economic policies on the economic equilibrium of a country