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Module_6_-_Balance_of_Payment

Module_6_-_Balance_of_Payment - ECONOMICS II(ECON 201...

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ECONOMICS II (ECON 201) Balance of Payment and Exchange Rates Module 6 3/25/16 1
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Balance of payment A Balance Of Payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. 3/25/16 2
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Balance of Payment All the transactions in the BOP are entered as Credit items (sources of funds) and Debit items (uses of funds). The Credit items or Sources of funds for a nation, are recorded as positive or surplus items. They are such as, Sales of exports Receipts of loans and investments Earnings of interest and dividends from abroad. 3/25/16 3
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BALANCE OF PAYMENT The Debit items or Uses of funds for a nation are recorded as a negative or deficit item. They are such as, Country’s purchases of imports. Investment it makes in foreign countries Interest and dividends paid to people abroad who have invested in the country. 3/25/16 4
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Balance of Payment When all components of the BOP sheet are included it must balance – that is, it must sum to zero – there can be no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries. 3/25/16 5
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Balance of Payment While the overall BOP sheet will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account. This can result in surplus countries accumulating hoards of wealth, while deficit nations become increasingly indebted. 3/25/16 6
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C U R R E N T A C C O U N T 1 . T r a d e i n g o o d s a ) E x p o r t s b ) I m p o r t s B a l a n c e o n t r a d e i n g o o d s 2 . T r a d e i n s e r v i c e s a ) E x p o r t s b ) I m p o r t s B a l a n c e o n t r a d e i n s e r v i c e s B a l a n c e o n t r a d e i n g o o d s a n d s e r v i c e s 3 . N e t i n c o m e f l o w s ( w a g e s a n d i n v e s t m e n t i n c o m e ) 4 . N e t c u r r e n t t r a n s f e r s ( g o v e r n m e n t a n d p r i v a t e ) C u r r e n t a c c o u n t b a l a n c e + 2 2 0 7 9 7 – 3 1 0 3 1 2 – 8 9 5 1 5 + 1 3 9 1 5 6 – 1 0 0 8 2 8 + 3 8 3 3 1 – 5 1 1 8 4 + 5 3 0 2 – 1 3 7 9 3 – 5 9 6 7 5 UK balance of payments: 2007 (£ millions) UK balance of payments: 2007 (£ millions) 3/25/16 7
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Policy Objectives: Internal and External A country is likely to have various internal and external policy objectives.
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