LEC 5 ECON 314 01/21/2014
The Balance of Payments Accounts
When we used BOP in this class we will be talking about the current account and the capital account.
Now we usually have the current account and the financial account. (Canada follows this)
CA = Current Account
KA = Capital Account
A record of all transactions made between the home
country and all other related countries during a specified
period of time. BOP compares the dollar difference of
the amount of exports and imports, including all financial
exports and imports. A negative balance of payments
implies more money flowing out of the country
than is coming in.
When –ve BOP then you imported more than you exported and vice versa. In an accounting sense the BOP always adds up to zero
When we are talking loosely about +ve and –ve balance of payments we are adding the current and
BOP – an indicator of economic and political stability
If a country has a consistently positive BOP, this could mean that there is significant foreign investment
within that country. It may also mean that the country does not export much of its currency.
Expenditure and Production in an Open Economy
CA = EX – IM = Y – (C + I + G )
When production > domestic expenditure, exports > imports: current account > 0 and
trade balance > 0
when a country exports more than it imports, it earns more income from exports than it spends on
net foreign wealth is increasing (lending to the Rest of the World)
When production I , thenCA > 0 so that net foreign investment and financial capital outflows for the domestic
economy are positive.
CA S I S = + S– I
I SCA S –
I CA (G T) –
Private savings are used to finance: private investment, the current account (net purchases to
foreigners) and the Government deficit.
CA S= p– I (G T)
A high government deficit causes a negative current account balance when other factors remain
An international transaction involves two parties, and each transaction enters the accounts twice: once
as a payment to foreigners (debit, ) and once as a receipt from foreigners (credit, +).
Current Account – exports & imports of goods and services, investment income, debtpayment
services, private and public net remittances and transfers. Capital Account – records the value of private FDI, Foreign loans by private international banks, loans
and grants from foreign governments and multilateral agencies. Subtracts “resident capital outflow”.
Currently, flows of special categories of assets (capital) i.e., typically nonmarket, nonproduced, or
intangible assets like debt forgiveness, copyrights and trademarks are included
Financial Account accounts for flows of financial assets (financial capital). The balance of payments always balances Due to the double entry of each transaction, the balance of payments accounts will balance by the
Current account + Financial account + Capital account = 0
The Capital and the Financial Accounts
Along with transactions pertaining to nonfinancial and nonproduced assets, the capital account
relates to dealings with debt forgiveness, the transfer of goods and financial assets by migrants leaving
or entering a country, the transfer of ownership on fixed assets, the transfer of funds received, to the
sale or acquisition of fixed assets, gift and inheritance taxes, death levies, patents, copyrights, royalties
and uninsured damage to fixed assets.
Detailed in the financial account are governmentowned assets (i.e., special drawin