Chapter 19:
The Balance-of-
Payments Accounts
Copyright © 2017 by the McGraw-Hill Companies, Inc. All rights reserved. 19-1
Chapter Thirteen: Balance of Payment
I- Introduction
II- Balance of Payment Accounting Principles
Credits and Debits
Double-Entry Bookkeeping
III- Balance of Payment main components
IIII- Accounting Balances and Disequilibrium
in International Transactions
I- Introduction
Part 1 and 2 dealt with the real as opposed to the
monetary side of the economy:
• Money was not explicitly considered.
• Discussion was in term of relative commodity prices.
This chapter begins our examination of monetary
aspects of the international economy or
International Finance.
• Money is explicitly brought to the picture.
• Prices are expressed in terms of domestic and foreign currency
units.
• We start by the BOP and then the exchange rate.
I- Introduction
The Balance of Payment: is a summary statement in
which, in principle, all the transactions of the
residents of a nation with the residents of all other
nations are recorded during a particular period of
time, usually a calendar year.
Main Purposes of the Balance of Payments are:
• Inform the government of the international position of the
nation and to help in its formulation of monetary, fiscal, and
trade policies.
• Governments also regularly consult the balance of payments
of important trade partners in making policy decisions.
• Information contained in the nation’s BOP is crucial to banks,
firms and individuals directly or indirectly involved in
international trade and finance.
I- Introduction
An International transaction: refers to the exchange
of a good, service, or asset (for which payments is
usually required) between the residents of one nation
and the residents of other nations.
• However, gifts and certain other transfers (for which no
payment is required) are also included in a nation’s balance of
payments.
Who is a Resident? Diplomats, military personnel,
tourists, and workers who temporarily migrate are
residents of the nation in which they hold citizenship.
Similarly, a corporation is the resident of the nation
in which it is incorporated, but its foreign branches
and subsidiaries are not.
II- Balance of Payment Accounting Principles
• 1-Credits and Debits
Credit Transactions are those that involve the receipt of
payments from foreigners.
Credit Transactions are entered with a positive sign.
Thus, the export of goods and services, unilateral transfers
received from foreigners, and capital inflows are entered as
credits (+) because they involve the receipt of payments from
foreigners.
II- Balance of Payment Accounting Principles
1-Credits and Debits
Debit Transactions are those that involve the making of
payments to foreigners.
Debit transactions are entered with a negative sign in the
nation’s balance of payments.
The import of goods and services, unilateral transfers or gifts
made to foreigners, and capital outflows involve payments to
foreigners and are entered as debits (-) in the nation’s balance
of payment.
II- Balance of Payment Accounting
Principles
1- Credits and Debits
Capital Inflow can take either of two forms: an increase in
foreign assets in the nation or a reduction in the nation’s
assets abroad.
•For example, when a U.K resident purchase an Egyptian stock,
foreign assets in Egypt increases. This is a capital inflow to
Egypt and is recorded as a credit(+) in Egypt’s balance of
payment.
•A Capital Inflow can also take the form of a reduction in the
nation’s assets abroad. For example, when an Egyptian resident
sells a foreign stock, the Egyptian assets abroad decreases. This
is a capital inflow to Egypt and is recorded as a credit(+) in
Egypt’s balance of payment because it involves the receipt of a
payment from foreigners.
II- Balance of Payment Accounting
Principles
1- Credits and Debits
Capital Outflows can take the form of either an increase in
the nation’s assets abroad or a reduction in foreign assets in
the nation because both involve a payment to foreigners.
•For example, the purchase of a U.K treasury bill by an Egyptian
resident increases the Egyptian assets abroad and is a debit(-)
because it involves a payment to foreigners.
•The sale of a German firm to its Egyptian subsidiary reduces
foreign assets in Egypt and is a debit(-) because it involves a
payment to foreigners.
II- Balance of Payment Accounting
Principles
1-Credits and Debits
To summarize,
•Export of goods and services, the receipt of unilateral
transfers, and capital inflows are credits (+) because
they all involve the receipt of payments from foreigners.
•On the other hand, the import of goods and services,
unilateral transfers to foreigners, and capital outflows
are debits (-) because they involve payments to
foreigners.
II- Balance of Payment Accounting
Principles
2- Double-Entry Bookkeeping
The nation’s international transactions are recorded in the BOP
according to the Double-entry booking accounting procedure.
This means that each international transaction is recorded
twice, once as a credit and once as a debit of an equal amount.
This is because each transaction has two sides; we sell
something and we receive payment for it. We buy something and
we have to pay for it.
For example, suppose that an Egyptian firm export a 500LE of
goods to be paid for in three months. Egypt first credits goods
exports for 500LE since this goods exports will lead to the
receipt of a payment from foreigners. The payment itself is then
entered as a capital debit because it represents a capital outflow
from Egypt.
III- BOP Main Components
1- Current Account .
2- Capital Account.
3- Official Reserve Account.
4- Statistical discrepancy.
III- BOP Main Components
1- The Current Account lumps together :
a-value of trade in merchandise(goods) and services:
• Services refers to trade in services of factors of production,
land, labor and capital.
• Included are travel and tourism, transportation costs and
insurance premiums.
b- Investment incomes: includes interest and dividends receipts
on national assets abroad( credit +) and interest and dividends
payed on foreign assets inside the nation ( debit -).
c-Unilateral transfers: includes gifts, foreign aid, remittances of
workers.
III- BOP Main Components
2- Capital Account, includes the change in the
nation’s owned asset abroad and foreign-owned
assets in the nation, other than official reserves.
• Nation’s owned assets abroad includes direct investment
abroad, foreign securities..etc.
• Foreign owned assets in the nation includes direct
investment in the nation, nation’s treasury securities….etc.
• This measures the change in the stock of all non
reserve financial assets.
• The justification for excluding financial reserve assets
from the capital account is that changes in reserves
reflect government policy rather than market forces.
III- BOP Main Components
3- Official Reserve Account, includes official
reserve assets:
a-Monetary gold: gold transactions by the monetary authorities( central
banks).
b- Foreign currency bank deposits owned by the monetary authorities.
c- Short term officially held foreign claims ( treasury bills)
d- Domestic currency bank deposits owned by foreign monetary authorities.
e- Short term domestic claims owned by foreign monetary authorities.
f- International monetary fund resources.
• d and e are reserves for foreign governments.
Transactions in the official reserve assets result from
imbalances in the current and capital accounts. They are
needed to balance international transactions. In other words to
finance imbalances in the current and capital accounts.
III- BOP Main Components
4- Statistical discrepancy,
this is due to errors in data collection and items
measurements and estimation.
IIII- Accounting Balances and
Disequilibrium in International Transactions
• All transactions in the current and capital accounts
are called autonomous transactions because they
take place for business or profit motives (except for
unilateral transfers) and independently of balance of
payments considerations.
• On the other hand, transactions in official reserve
assets are called accommodating transactions
because they result from and are needed to balance
international transactions.
• The accommodating items form the official reserve
account, and the balance on official reserve account is
called the official settlements balance.
IIII- Accounting Balances and
Disequilibrium in International Transactions
Deficit in BOP:
• when total debits exceed total credits in the current and
capital accounts.
• This is net debit balance: measures the deficit in the
nation’s balance of payment.
• This deficit must then be settled with an equal credit balance
(excess of credits over debits) in the official reserve account.
• Thus, a deficit in the balance of payment can be measured
either by the excess of debits over credits in the current and
capital accounts or by the excess of credits over debits in the
official reserve account.
IIII- Accounting Balances and
Disequilibrium in International Transactions
Surplus in the BOP:
• When total credits exceed total debits in the current and
capital accounts.
• This is a surplus in the balance of payment .
• The net credit balance gives the size of the surplus.
• It is settled by an equal debit balance(excess of debits over
credits) in the official reserve account. Which takes the form
of increasing foreign reserves in the central bank or
investment abroad or lending to foreign governments.
