Chapter 12

Chapter 12 - Ch 12 The Balance Of Payments BOP is an...

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Ch. 12: The Balance Of Payments BOP is an accounting statement based on double entry book keeping. Each transaction must be recorded twice as a credit and as a debit. If foreign exchange flows into the country, it is a credit . If capital goes out of the country, it is a debit . Example: An American exporter sells computer to a firm in Belgium and allows the buyer 90 days’ credit to pay. The computer export is a credit in the merchandise account, and the credit extended is a debit to short term capital. If sum of credits > sum of debits a surplus in the BOP. If sum of credits < sum of debits a deficit. There is a distinction between private and official transactions in the BOP. There are several summary measures of the balance of payments including the Balance of Trade and the current Account…etc. Current Account: Is the value of trade in merchandize, services, investment income and unilateral transfers. Merchandize : Trade in tangible commodities or goods. Services: ( factor) Services of labor, capital and land. Also included in this category are non factor Services such as travel, tourism, royalties, transportation costs and insurance premiums. Unilateral transfers : Include transfers such as US foreign aid, gifts, retirement pension, and interest payments to foreigners on their holdings in the US government debt. Year 2000 Balance on merchandize trade -452.423b (deficit) Balance on services + 73.742b (surplus) Balance on investment income 21.782b Unilateral transfers - 53. 442b Balance on current account -410.341b (deficit)
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The current account deficit rose to $856.7 billion in 2007 from $791.5 in 2006. We can draw a line in the balance of payments to sum the debit and credit items above this line. If we draw a line at the Current Account then all the items below the line amount to financing the merchandize, services, investment income and unilateral transfers above the line. B.O.P = Current Account + Capital Account + Statistical discrepancy = 0 Then Current Account + Capital Account = - Statistical discrepancy If statistical discrepancy = 0 then Current Account = - Capital Account The statistical discrepancy has an opposite sign to the sum of the current account and the capital account. Recall the current account has an opposite sign to the capital account. Thus, the entries below the line amount to financing the items in the current account. If the balance of the entries in the capital account is positive then there is a net inflow of funds from abroad to the country. Therefore, the Current Account indicates whether the country is a net borrower or net lender to the rest of the world on the capital account. If the current account
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This note was uploaded on 04/03/2012 for the course ECON 300 taught by Professor Gang during the Fall '06 term at Rutgers.

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Chapter 12 - Ch 12 The Balance Of Payments BOP is an...

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