Lecture2_part1 - Balance of Payments Lecture 2 Lecture...

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Balance of Payments Lecture 2
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Lecture Outline Balance of Payments Accounting Balance of Payments Accounts The Current Account The Capital Account Financial Account Statistical Discrepancy The Balance of Payments Identity Balance of Payments Trends in Major Countries National Income Causes and Consequences of CA deficits Remedies for CA deficits National Income 2
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Balance of Payments Accounting The balance of payments: Accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries Kind of like a company’s income statement Residents ” means businesses, individuals and government agencies, including citizens temporarily living abroad but excluding local subsidiaries of foreign corporations An international transaction involves two parties, and each transaction enters the accounts twice: once as a credit (+) and once as a debit (–). The rules: If you have to pay a foreign resident, normally in exchange for something that you bring into the country, then the something counts as a debit. If a foreign resident has to pay you for something, then the something counts as a credit. Note: When we say “a country’s balance of payments” we are referring to the transactions of its citizens and government . 3
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Balance of Payments Accounts (cont.) The balance of payments accounts are separated into 3 broad accounts: current account : accounts for flows of goods and services (imports and exports). financial account : accounts for flows of financial assets (financial capital). capital account : flows of special categories of assets (capital): typically nonmarket, non-produced, or intangible assets like debt forgiveness, copyrights and trademarks. For most countries, only the current and financial accounts are significant.
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Balance of Payments Accounts Major accounts of the Balance of Payments: I. The Current Account Includes all imports (M) (-) and exports (X) (+) of goods and services ( payments for legal services, shipping services, tourist meals, etc.) . If the debits exceed the credits, then a country is running a trade deficit . If the credits exceed the debits, then a country is running a trade surplus . Investment income (interest and dividend payments, earnings of firms and workers operating in foreign countries) Includes net unilateral transfers (this is money sent to or received from abroad for which nothing is expected in return - think of remittances by immigrant workers or international development spending, EU transfers) The current account is the trade balance plus the net amount received for domestically-owned factors of production used abroad.
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