Chapter 10
The balance of payments

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–1


Lecture plan
• Definition of balance of payments
• The IMF standard presentation
• The current account
• The capital and financial account
• The double-entry system; examples of
records
• Australia’s balance of payments
• Comparative current account balances
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–2


The balance of payments (BOP)
• Record of the value of all the economic
transactions between

– residents of one country (e.g. individuals,
firms, governments) and
– residents of all other countries during a
given time period.

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–3


The balance of payments (BOP)

cont.

• Double-entry bookkeeping system
• For nations with floating currencies, the
entire balance of payments by definition
must numerically balance, while individual
accounts or subaccounts may not balance.

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–4



The standard IMF presentation
• Current account
• Capital and financial account

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–5


Current account
International transactions involving goods and/or
services, income and current transfers. Main items:
1. Goods and services
(a) goods (5 items)
(b) services (11 items)
2. Income
(a) compensation of employees
(b) investment income (e.g. FDI profits, other)
3. Current transfers (payments in cash and kind
by residents to non-residents)
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–6



Capital and financial account
The country's transactions in monetary
and ownership claims.
1. Capital account
(a) capital transfers (e.g. involving
transfers of ownership of fixed assets);
general government and other
(b) acquisition/disposal of non-produced,
non-financial assets (e.g. intangibles,
such as patented entities, leases,
goodwill)
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–7


Capital and financial account cont.
2. Financial account
(a) direct investment
(b) portfolio investment
(c) other investment (e.g. trade credits,
loans, currency and deposits, other)
(d) reserve assets
Net errors and omissions


Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–8


Imports of goods
Item/
Commodity

Debit
(B$ million)

1–A1 Goods

10.0 Oil imports

2–B3b Other
investment

Credit
(B$ million)

10.0 Decreases
in S-T foreign
assets held by
residents


Source: Exercise 1, p.243
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–9


Imports of services
Item/
Commodity
1–A21
Transportation
services

Debit
(B$ million )

Credit
(B$ million)

1.0 Payments
for freight
services
1.0 Decrease in
S-T foreign
assets held
by residents


2–B3b
Other S-T
investment
Source: Exercise 2, p.243 

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–10


Investment income
Item No/Name

Debit
(B$ million)

Credit
(B$ million)

1–B2 Investment 4.0 Profits of
income
FDI in
Bucksland
2–B1 Direct
2.0 Increased
investment
investment in

Bucksland
enterprises
2–B3b Other S2.0 Decreases in
T
investment
S-T domestic
Source: Exercise 3, p.243

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

liabilities 10–11


Current transfers
Item/
Commodity

Debit
(B$ million)

1–C1 Current
transfers

0.5 Payment in
kind to nonresidents

1–A1 Goods


Credit
(B$ million)

0.5 Food exports

Source: Exercise 4, p.244
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–12


Direct investment
Item No/
Name

Debit
(B$ million)

2–B1
Direct
investment

Credit
(B$ million)

14.0 Increased

investment in
foreign enterprises

1–A1
Goods

7.0 Exports to nonresident
destinations

2–B3b
Other S-T

7.0 Decreases in
S-T foreign
assets
held by residents

investment

Source: Exercise 5, p.244

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–13


Other investment

Item/
Commodity

Debit
(B$ million)

Credit
(B$ million)

2–B3a
9.0 L-T loans by
Other
non-residents
investment
to residents
(L-T)
2–B 3b Other 9.0 Increases in
investment
S-T foreign
(S-T)
assets held by
residents
Source: Exercise 6, p.244
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
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10–14



Bucksland’s BOP balances
Debit
(B$ million)

Credit
(B$ million)

10 + 1

0.5 + 7

Balance on G & S

11

7.5

1–B Income

4

1–A Goods and services

Balance on G&S & income

15

1–C Current Transfers


0.5

Current Account Balance
(1A + 1B + 1C)

15.5

Source: adapted from Table 10.2
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
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7.5

7.5
CAD = B$8.0 m.

10–15


20
03
-0
4

03
20
02
-


02
20
01
-

01
20
00
-

00
19
99
-

99
19
98
-

0

19
97
-

98

Australia’s current account balance by

component, $A million, 1997–98 to 2003–04

-5 000
-10 000

Net goods

-15 000

Net services

-20 000

Net income*

-25 000

CAB

-30 000

* Includes net
current transfers

-35 000
-40 000
Source: adapted from Reserve Bank, Bulletin, Table H
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
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10–16


Australia’s current account deficit as
% of GDP, 1991–2003
0
-1

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

% of GDP

-2
-3
-4
-5
-6
-7

Source: OECD, Economic Outlook No.76/2004
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–17



Comparative current account balance in
selected economies, $US b., % of GDP
Economy

$US billion

US

% of GDP

- 530.7

-4.8%

Japan

136.2

3.2%

Australia

- 30.2

- 5.9%

New Zealand

- 3.3


-4.2%

China

45.9

3.2%

H. Kong, China

16.7

10.7%

Singapore

28.2

30.9%

Republic of Korea

12.3

2.0%

Malaysia

13.3


12.9%

Source: based on IMF data (World Bank source for Malaysian GDP)
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

10–18