4324Ch3 - Performed annually Chapter 3 Balance-of-Payments...

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© Sanjiv Sabherwal, 2015, All rights reserved. 1 1 Chapter 3: Balance-of-Payments A country’s balance-of-payments (bop) is an accounting statement that summarizes all the economic transactions of that country’s citizens, businesses, and governments with citizens, businesses, and governments of all other countries. Examples of such transactions: Export and import of goods and services; cross-border investments in businesses, real estate, and financial assets; financial aid provided to or received from other countries, etc. 2 The Basics of Balance-of-Payments The financial inflows to a country (receipts from foreigners) are treated as credits (with a positive sign). The financial outflows from a country (payments to foreigners) are treated as debits (with a negative sign). For example, - An export from the U.S. creates a financial inflow to the U.S. - An import to the U.S. creates a financial outflow from the U.S. - A Japanese firm setting up a plant in the U.S. creates a financial inflow to the U.S. - An American firm setting up a plant in Europe creates a financial outflow from the U.S. - Asian investors purchasing T-bills in the U.S. create a financial inflow to the U.S. 3 The Basics of Balance-of-Payments (… continued) The Balance-of-Payments Statement is based on double- entry bookkeeping – For every credit in the account, there is a matching debit, and vice-versa. While double entry bookkeeping is to be employed in a BoP statement as per theory, it isn’t always practical.
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© Sanjiv Sabherwal, 2015, All rights reserved. 2 4 The Basics of Balance-of-Payments (… continued) A country’s international transactions can be grouped into three main types: - Current account - Capital account - Official reserve account Since recordings of international transactions cannot be done perfectly, there is also an entry called “statistical discrepancies”. It reflects omitted and misrecorded transactions, and the fact that double entry bookkeeping is employed in theory but not in practice.
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