Chapter2 BOP.ppt

Huang zhiyong,Nanjing University of Finance&Economics Tel：84028241,INTERNATIONAL FINANCE,Payments among Nations BOP,Outline:What is BOP and its structure?The rule of Balance of Payments AccountsThe analysis of BOP and the Macro MeaningThe difference of BOP and IIP?Balance of Payments Trends in Major Countries,一、What is BOP and its structure?,（一）Definition:The balance of payments is the record of the economic and financial flows that take place over a specified time period between residents and non-residents of a given country.Notice:Time period；Residents and non-residents；,（二）The rule of Balance of Payments Accounts Method of Record：Double-entry bookkeepingThe positive items(credits，+)：an item for which the country must be paid.Such as exportsThe negative items(debits，-)：an item for which the country must pay.Such as imports.,Total credits+Total debits=0If we add up all the positive items and all the negative items in a countrys BOP,the total will be zero.Capital inflows are Credits(+)Capital outflows are Debits(-)Note the difference between capital and Asset,Sub-balance：look at smaller collections of positive and negative items by grouping them into categories.these balance may be positive,negative or zero.Surplus：positiveDeficit：negative,二、The structure of BOP,StructureBOP is composed of the Four major parts:The Current AccountThe Capital and Financial AccountChanges in official international reservesStatistical discrepancy,（一）The Current Account,It includes all debit and credit items that are exports and imports of goods(Merchandise)services,income receipts and income payments Gifts(Unilateral current transfers).,Textbook p17.Figure 2.1,中国国际收支平衡表http:/,美国联邦统计局http:/www.fedstats.gov/,Goods and services balance(or trade balance)add up all the items for exports and imports of goods and services.It is an important balance within the current account.Measures a countrys net exports.,Income flows are mainly payments to holders of foreign financial assets.InterestDividendsOther claims on profits by the owners of foreign businesses.Payments to foreign workers who are only in the country for a short time,Unilateral(or unrequited)current transfers are the items that keeps track of gifts that the country makes and gifts that it receives.Government grantsPrivate transfer：international migrants remittances of money and goods back to their families in the home countryCharitable giving.,中国国际收支平衡表（2009）单位：亿美元,中国国际收支平衡表（2009）单位：亿美元,（二）The capital and Financial account,The capital account：it includescapital transfers acquisition/disposal of non-produced,nonfinancial assets.,Capital transfers consist of transfers of ownership of fixed assets;transfers of funds linked to,or conditional upon,acquisition or disposal of fixed assetscancellation,without any counterparts being received in return,of liabilities by creditors.,Acquisition/disposal of nonproduced,nonfinancial assets largely covers intangiblessuch as patented entities,leases or other transferable contracts goodwill,etc.,Financial account includes direct investment,portfolio investment,other investment,Direct investment is the category of international investment that reflects the objective of a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy.,Portfolio investment includes,in addition to equity securities and debt securities in the form of bonds and notes,money market instruments and financial derivatives such as options.,Other investment is a residual category that includes all financial transactions not covered in direct investment,portfolio investment,or reserve assets.,（三）Official reserves assets,Official reserves assets are money-like assets that are held by governments and that are recognized by governments as fully acceptable for payments between them.It includes GoldForeign currenciesSDRsReserve positions in the IMF.,（四）Statistical Discrepancy,It is the net result of errors and omissions on both the credit and debit sides.Which items appear to be most seriously undermeasured?Hiding the importsForeign investment incomes Capital flight from their own government officials,ect.,Statistical discrepancy(sum of above items with sign reversed),Example,Transaction 1:A merchandise exportA Californian vineyard sells 5000 bottles of wine to a Japanese retailer.The price of wine when it leave the vineyard is USD 250,000 and it costs USD 15,000 to ship the wine to the airport in Los Angeles from where it will be flown to Tokyo.The“FOB”price will be USD 265,000.,Credit,Debit,Transaction 2:A merchandise importA department store located in New York,buys USD 200,000 worth of textiles from a South Korean company.It pays for the goods with a check drawn on a New York branch of Citicorp.,Transaction 3:an export of a non-financial serviceA Frenchman spend his two-week vacation traveling around the U.S.,He buys a round trip ticket on American Air Lines for the equivalent of USD 7000 and spends an extra USD 100 for headphones and drinks while on the plane.His US expenses is USD 14,900.He pays American Air Lines in cash with euros and obtains the USD 14,900 by selling euros to a US branch of Citicorp.,Transaction 4:Investment income:The export of a financial serviceElepha,Inc.,a wholly owned Nigerian subsidiary of Phi.Inc.based in the New York,has after-tax profits of the equivalent of USD 100,000 and declares a dividend of USD 50,000.Phi uses the dividend to purchase long-term bonds issued by the Nigerian government.,Transaction5:An unrequited transferHassan is a citizen of Algeria but has been a resident of the U.S.for several years,transfers USD 5000 from his account at a New York branch of citicorp to his ageing fathers account at an Algiers branch of the Algerian National Bank.,Use with INTERNATIONAL FINANCE 2/E ISBN 1-86152-9716Published by Thomson Learning Ephraim Clark,(Capital and Financial account),=20000+5000-265000-22000,Transaction6:A reserve transaction with a non-residentNatwest bank in London pays USD 100,000 to buy GBP 62,500 from the Fed.,Transaction 7:A reserve transaction A Swiss branch of Citicorp sells SF 75,000 to the Fed for USD 50,000.,Use with INTERNATIONAL FINANCE 2/E ISBN 1-86152-9716Published by Thomson Learning Ephraim Clark,The Balance of Payments Identity,CA+FA+OR=0whereCA=balance on current accountFA=balance on capital and financial accountOR=balance on the reserves accountUnder a pure flexible exchange rate regime,CA+FA=0,三、The analysis of BOP and the Macro Meaning,SIX key balancesGoods and services balanceCurrent account balanceNet private capital flowsORofficial reserveOverall balanceStatistical discrepancy,Overall balanceThe official settlements balance(B)：measures the sum of the current account balance plus the(nonofficial)financial account balance,B=CA+private FA+statistical discrepancy,B+OR=0,B also includes the statistical discrepancy,because we assume that the discrepancy results from mismeasurement of private transactions.,(一)The Macro Meaning of CA,1.Financing and international financial flows:Net foreign investment(If).CA=If 2.National saving(S)versus domestic investment(Id).S=Id+If,so that CA=S Id,3.Domestic production(Y)versus national expenditure(E).Y=C+Id+G+(X M),E=C+Id+G,and CA=(X M)approximately,so that CA=Y E,To summarize,CA=net foreign investment(If)=the difference between national saving and domestic investment(S-Id)=the difference between domestic product and national expenditure(Y-E),Figure 2.2 Current Account Balances and Goods and Services Balances for the United States,Canada,Japan,and Mexico,19632001.,Figure 16.2 Current Account Balances for the U.S.,1963-2010,Current Account Balances for Canada,1963-2010(Figure 16.2 Cont.),Current Account Balances for Japan,1963-2010(Figure 16.2 Cont.),Current Account Balances for Mexico,1963-2010(Figure 16.2 Cont.),（二）The macro meaning of the overall balance,B=-ORIf B0,it equals an accumulation of official reserve assets by the country or a decrease in foreign official reserve holdings of the countrys assets.,Most of the transactions by monetary authorities that result in changes in official reserve holdings are official intervention by these authorities in the foreign exchange markets.,The monetary authorities and the exchange rate,Under a pure flexible exchange rate regime,CA+FA=0Under a fixed exchange rate regime,CA+FA+OR=0whereCA=balance on current accountFA=balance on capital and financial accountOR=balance on the reserves account,U.S.Balance of Payments Data(2000),U.S.Balance of Payments Data,In 2000,the U.S.imported more than it exported,thus running a current account deficit of$444.69 billion.,U.S.Balance of Payments Data,During the same year,the U.S.attracted net investment of$444.26 billionclearly the rest of the world found the U.S.to be a good place to invest.,U.S.Balance of Payments Data,Under a pure flexible exchange rate regime,these numbers would balance each other out.,U.S.Balance of Payments Data,In the real world,there is a statistical discrepancy.,U.S.Balance of Payments Data,Including that,the balance of payments identity should hold:CA+KA=OR,($444.69)+$444.26+$0.73=$0.30=($0.30),四、The international investment position（IIP),IIPA balance sheet that complement the balance of paymentsA statement of the stocks of a nations international assets and foreign liabilities at a point in time,usually the end of a year.,U.S.IIP at the end of selected years($billion),18339.9,19244.9,277.2,293.7,94.5,624.1,15408.9,12199.6,20255.6,22738.8,3411.8,3940.0,14355.9,12830.9,Figure 16.3 U.S.International Investment Position at the End of Selected Years,1897-2009($billions),We say that a nation is a lender or a borrower depending on whether its current account is in surplus or deficit during a time period,And a nation is a creditor or debtor depending on whether its net stock of foreign assets is positive or negative.,（五）Balance of Payments Trends,Balances on CA and FA of Japan,Source:IMF International Financial Statistics Yearbook,2000,Since 1982 the U.S.has experienced continuous deficits on the current account and continuous surpluses on the capital account.During the same period,Japan has experienced the opposite.,Balances on CA and FA of Germany,Source:IMF International Financial Statistics Yearbook,2000,Germany traditionally had current account surpluses.Since 1991 Germany has been experiencing current account deficits.This is largely due to German reunification and the resultant need to absorb more output domestically to rebuild the former East Germany.,Balances on the Current(CA)and Capital(FA)Accounts of China,Source:IMF International Financial Statistics Yearbook,2000,Balances on CA and FA Accounts of Five Major Countries,Source:IMF International Financial Statistics Yearbook,2000,Summary,Definition of BOPThe structure of BOPThe balance of trade,the CA balance,The net private capital account balance,the overall balanceand the official reserve assetsThe macro meaning of CA and the overall balanceIIP,Internet,IMF:www.imf.org/external/index.htmUnited Nations:www.un.org/database/index.htmlThe World Bank Group:www.worldbank.orgEuropa(EU):europa.eu/BIS:www.bis.org/index.htmU.S.Bureau of Economic Analysis www.bea.gov/international/index.htmU.S.Ministry of Finance:www.mof.go.jp,