19.1 The Balance of Payments

Question 1

What is a Balance of payments accounts?

Answer 1

Balance of payments accounts

A summary record of a country’s transactions with the rest of the world, including the buying and selling of goods, services, and assets.

Question 2

How are each transatction in a balance of payments account classified?

Answer 2

Each transaction, such as the exports or imports of goods, or the international purchase or sales of assets, is classified according to whether the transaction generates a payment or a receipt for Canada.

Question 3

What do we actually meanw hen we say transations between “Canada and the rest of the world”?

Answer 3

When we say transactions between “Canada and the rest of the world” we mean transactions between Canadian individuals, businesses, or governments and similar entities in some other country.

Question 4

What are transations that represent a receipt for Canada recorded in the BoP accounts as?

Answer 4

Transactions that represent a receipt for Canada, such as the sale of a product or asset to foreigners, are recorded in the balance of payments accounts as a credit item.

Question 5

What are transations that represent a payment for canada recorded in the BoP Accounts as?

Answer 5

Transactions that represent a payment for Canada, such as the purchase of a product or asset from foreigners, are recorded as a debit item.

Question 6

The overall balance of payments will always…

Answer 6

The overall balance of payments always balances, but the individual components do not have to.

Question 7

What are the two main categories to the balance of payments?

Answer 7

There are two main categories to the balance of payments:

-The current account
-The capital account.

Question 8

What is the “Current Account”?

Answer 8

Current account

The part of the balance of payments accounts that records payments and receipts arising from trade in goods and services and from interest and dividends that are earned on assets owned in one country and invested in another.

Question 9

The current account is divided into two main sections. What are they?

Answer 9

Trade Account
Capital-Service Account

Question 10

What is the Trade Account?

Answer 10

Trade account

In the balance of payments, this account records the value of exports and imports of goods and services.

Question 11

What is the Capital-service account?

Answer 11

Capital-service account

In the balance of payments, this account records the payments and receipts that represent income earned on assets (such as interest and dividends).

Question 12

What is the Capital account?

Answer 12

Capital account

The part of the balance of payments accounts that records payments and receipts arising from the purchase and sale of assets.

Question 13

What is Capital Outflow?

Answer 13

When a Canadian purchases a foreign asset, the transaction is treated similarly to the purchase of foreign goods.

Since purchasing a foreign asset requires a payment from Canadians to foreigners, it is entered as a debit item in the Canadian capital account.

Note that when Canadians purchase foreign assets, financial capital is leaving Canada and going abroad, and so this is called a *capital outflow. *

Question 14

Why are the government’s transactions in its official foreign-exchange reserves included in the capital account? What are they called?

Answer 14

This official financing account is included as part of the capital account because official reserves are assets rather than goods or services.

Question 15

How does the government increase its reserves and how is it recorded?

Answer 15

If the government increases its reserves, it does so by purchasing foreign-currency assets, and this is recorded as a debit item in the official financing account.

(This transaction is a debit because a payment from Canada is made in Canadian dollars.)

Question 16

How does the government reduce its reserves?

Answer 16

If the government instead reduces its reserves, it sells some foreign-currency assets, and this transaction would be recorded as a credit item in the official financing account. (This transaction is a credit because there is a receipt to Canada of Canadian dollars.)

Question 17

What is the balance of payments the sum of?

Answer 17

The current account balance represents the difference between the payments and receipts from international transactions in goods and services.

The capital account balance is the difference between payments and receipts from international transactions in assets.

The balance of payments is the sum of current account and capital account balances.

Question 18

Balance of Payments algebraicly

Answer 18

CA is the current account balance
KA is the capital account balance.

Question 19

Consider a situation where canada has a 50 billion surpus in the CA balence. The meaning of this $50 billion surplus is that Canadians now have claims on foreigners equal to $50 billion—that is, foreigners owe Canadians $50 billion.

What does Canada do with these claims?

Answer 19

Question 20

Why couldn’t Canadians simply leave their purchases of goods and services unchanged and decide not to purchase any additional assets.

Answer 20

With such a CA surplus, however, Canadians are holding a new “IOU” from foreigners of $50 billion.

The accounting system defines the appearance of this new IOU as the purchase of an asset in the capital account.

This asset may take many forms (stocks, bonds, bank balances, etc.) but it must appear as a capital account deficit.

Question 21

Why is the Balance of payments always zero?

Answer 21

Any surplus (deficit) on the current account must be matched by an equal deficit (Surplus) on the capital account.

A current account surplus (deficit) thus implies a capital outflow (inflow).

The balance of payments is always zero.

Question 22

When the term “Balence of Payments deficit” is used, what is typically actually meant?

Answer 22

a balance of payments deficit is mentioned when what is actually meant is a current account deficit.

There are also occasions when people speak of a country as having a balance of payments deficit or surplus when they are actually referring to the balance of all accounts excluding the official financing account.

In other words, they are referring to the combined balance on current and capital accounts, excluding the changes in the government’s foreign-currency reserves.

Question 23

What can we think of The Current Account as?

Answer 23

The current account shows all transactions in goods and services between Canada and the rest of the world (including investment income and transfers). Think of this as the “income and expenditures” section.

Question 24

What is the formula for net change in the stock of investments abroad?

Answer 24

Net change = ( export minus import) - net foreign investment income - (Cap out -Cap in)

Question 25

A Positive value for the line item​ “Changes in official international​ reserves” in the balance of payments statement indicates that

Answer 25

the Bank of Canada decreased its reserves of foreign exchange.

Question 26

If Canada is said to have a balance of payments deficite, this means that

Answer 26

Question 27

Answer 27

-105