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Balance of Payments

Balance of Payments. Antu Panini Murshid. Today’s Agenda. Balance of payments Review sustainability of current accounts. Balance of Payments Accounts.

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Balance of Payments

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  1. Balance of Payments Antu Panini Murshid

  2. Today’s Agenda • Balance of payments • Review sustainability of current accounts

  3. Balance of Payments Accounts • The balance of payments is a comprehensive statement of a country’s economic transactions with the rest of the world for a given period of time—normally a quarter or a year • It is composed of the current account and the capital account

  4. Current Account • The current account measures transactions associated with trade in goods and services, income from abroad and also transfers and gifts • Remember the current account is more than simply the balance of trade, which is a narrower concept

  5. Capital Account • The capital account measures financial transactions, such as purchases of bonds and equities or direct investment activities

  6. The Balance of Payments Must Balance • The current account and capital account should balance each other out • Each international transaction gives rise to two offsetting entries one appearing in the current account and the other appearing in the capital account • Thus a current account surplus is matched by a capital account deficit and a current account deficit is matched by a current account surplus

  7. The Change in Foreign Reserves • The change in foreign reserves refers to the sale and purchase of official reserve assets by central banks • Official reserves are foreign assets held by the central bank (usually as cushion against economic troubles)

  8. The Change in Foreign Reserves • The change in foreign reserves appears in the capital account, although sometimes people will separate this item from the capital account and refer to a “balance of payments deficit” (or surplus) • Change foreign reserves = CA + KA Balance of payments Here “KA” refers to the non-reserve capital account

  9. Example

  10. US Balance of Payments Accounts, 1999

  11. Sustainability of the Current Account • What factors affect the sustainability of a current account deficit? • Growth rate • Composition of the current account • Openness • CA/GDP and debt burden • Composition of capital flows • Foreign exchange reserves • Financial system • Political stability

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