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Economics 2152A/B
Ayoub Yousefi

Balance of Payments Accounting A country’s balance of payments accounts keep track for its payments to and its receipts from foreigners - Any transaction resulting in a receipt from foreigners is entered in BOP as a credit (+) item - Any transaction resulting in a payment to foreigners is entered in BOP as a debit (-) item The Current Account: - Accounts for flows of goods and services (imports and exports), along with net transfers between countries - Example: a French consumer imports Canadian product. This is a credit for Canadian BOP. The components of the current account balance are: - Net export of goods and services - Investment income from assets abroad - Current transfers Net Export of Goods and Services - The merchandise trade is trade in goods. o A car brought to Canada from Japan is a good merchandise import for Canada o It is a debit item for Canada (-) o It is a credit item for Japan (+) - The trade in services includes, for example, transportation or tourism o A Canadian tourist in Mexico is import tourism services for Canada o It is a debit item for Canada (-) o It is a credit item for Mexico (+) Investment Income from Assets Abroad - The investment income is interest payments, dividends, royalties a country residents receive from assets owned abroad. - NFP and net investment income from abroad are equivalent concepts. Current Transfers - Current Transfers are payments from one country to another that do not correspond to the purchase of any good, service or asset. - A transfer by a Canadian abroad is a debit item (-) for Canada. Current Account Balance - The current account balance is obtained by adding all the credit items and subtracting all the debit items - The current account surplus is a positive current account balance - The current account deficit is a negative current account balance The Capital Account - The capital and financial account records trade in existing assets, either real (direct investment) or financial (portfolio investment) - The financial account records direct and portfolio investment - The capital account records migrants’ funds, inheritances, and transactions of intellectual property. - If Canada sells an asset to another country for Canada it is financial inflow, a credit item (+) in the capital account - If Canada buys an asset to abroad for Canada it is financial outflow, a debit item (-) in the capital account The Capital Account Balance - The capital account equals the value of capital inflows (credit items) minus the value of capital outflows (debit items) - The capital account surplus is a positive capital account balance - The capital account deficit is a negative capital account balance The Official Settlements Balance - The official settlements balance or the balance of payments is the net increase (domestic less foreign) in a country’s official reserve assets. - The official reserve assets are assets used in international payments - The balance of payments can be in surplus or in deficit The Current and the Capital Account - The current account (CA) balance and the capital account (KA) balance must sum to zero at each period of time. CA + KA = 0 Current Account Capital Account Net Exports = Exports – Imports -Increase in Canadian owned assets abroad (capital outflow)
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