CH03sguide - 3 TheBalanceofPayments ChapterObjectives 1. To...

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Chapter Objectives 1. To define the balance-of-payments accounts. 2. To discuss the actual balance of payments. 3. To explain the means for correcting a balance-of-payments deficit. Chapter Outline I. Overview of the Balance of Payments A. Balance of payments is defined as the record of transactions between a country’s residents and foreign residents over a time period. i. These transactions include imports and exports of goods and services, cash receipts and payments, gifts, loans, and investments. ii. Residents include business firms, individuals, and government agencies. iii. The balance of payments helps business managers and government officials analyze a country’s competitive position and forecast the direction of pressure on exchange rates. B. Balance of Payments Accounting. i. Balance of payment statistics are gathered on a single-entry basis with each entry being either a credit (marked with a plus (+) sign) or a debit (marked with a minus (-) sign). 1. The following transactions represent credit transactions: a. Exports of goods and services. b. Investment and interest earnings. c. Transfer receipts from foreign residents. d. Investments and loans from foreign residents. 2. The following transactions represent debit transactions: a. Imports of goods and services. b. Dividends and interest paid to foreign residents. The Balance of Payments 29 3 The Balance of Payments
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c. Transfer payments abroad. d. Investment and loans to foreigners. ii. A country incurs a “surplus” if credit transactions exceed debit transactions, i.e. if it earns more abroad than it spends. iii. A country incurs a “deficit” if debit transactions exceed credit transactions, i.e. if it spends more abroad than it earns. iv. Typically, analysts focus on those transactions that occur because of self-interest, e.g. exports, imports, unilateral transfers, and investments (also known as autonomous transactions or above-the- line items). 1. The sum of the autonomous transactions represents the balance of payment’s surplus or deficit. 2. Compensating transactions occur to account or compensate for deficits, usually using below-the-line items. v. Surpluses and deficits are used by banks, companies, portfolio managers, and governments for the following: 1. Predict pressures on foreign exchange rates. 2. Anticipate governmental policy actions. 3. Assess a country’s credit and political risks. 4. Evaluate a country’s economic health. II. Different types of Balance of Payments Accounts A. The IMF classifies balance of payments transactions into five major groups: Current Account (Group A), Capital Account (Group B), Financial Account (Group C), Net Errors and Omissions (Group D), Reserves and Related Items (Group E), and Total (a.k.a. Overall Balance of Payments). B. It is important to note that fundamentally countries interact in two ways:
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CH03sguide - 3 TheBalanceofPayments ChapterObjectives 1. To...

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