BoP

Question 1

What does BoP stand for

Answer 1

Balance of Payment

Question 2

Describe the BoP briefly

Answer 2

1. A statistical summary of transactions
2. Between domestic and foreign residents
3. Over a specified period of time (usually one year)

–> The BoP basically represents an accounting of a country’s international transactions.

But: The BoP is not a balance sheet but a cash flow statement!

Question 3

What is BoP informative about?

Answer 3

1. The BoP can be informative about the health of an economy
2. and may signal potential shifts in exchange rates.

Question 4

What is it commun to group the accounts as?

Answer 4

• Current account (CA)
• Capital and financial account (KFA)
• Statistical discrepancies; Errors and omissions (E&O)

Question 5

How are the transactions recorded?

Answer 5

Each transaction is recorded twice (as in standard double-entry accounting):

• As a source of foreign currency (a conceptual inflow of foreign money)
• and as a use of foreign currency (a conceptual outflow of foreign money)

Question 6

How is the sources and uses shown in the BoP?

Answer 6

1. Sources get a plus sign (credit). The source side tells us where we obtained the money. (export of goods or services, income from labor or capital abroad, foreign assets sold, borrow from abroad, deplete bank account!)
2. Uses get a minus sign (debit). The use side tells us what we did with the money. (import of goods or services, pay income or dividends, buy foreign assets, lend money internationally, give money as development aid, put money into bank account!)

Question 7

What happens to the BoP in this example?

A U.K. company exports goods to a customer in Singapore who pays cash

Answer 7

U.K. CA: + (export of goods, source of foreign money)

U.K. KFA: – (use of foreign money, put in bank account)

Question 8

What happens to the BoP in this example?

A U.S. company imports goods from Germany, German firm lends money

Answer 8

U.S. CA: – (import of goods, use of foreign money)

U.S. KFA: + (receive loan, source of money)

Question 9

What happens to the BoP in this example?

A U.S. investor buys shares for GBP 50m of a British company for speculation and sells an equal amount of British bonds

Answer 9

U.S. KFA: + (bonds sold, source of money)

U.S. KFA: – (equities bought, use of money)

Question 10

What happens to the BoP in this example?

A Russian IT company sells computers for RUB 1m to a British consulting firm in exchange for services

Answer 10

Russian CA + (export of goods, source of money)

Russian CA – (import of services, use of money)

Question 11

What is the formulae for calculating the BoP?

Answer 11

CA + KFA + EO = 0,

Question 12

Is there a difference in the formuae for BoP between different countries/circumstances?

If yes, what is the formulae then?

Answer 12

It is the same formulae, however for countries with a fixed exchange rate it is sometimes useful to write:

CA + Regular-KFA + DCB reserves +EO = 0,

Question 13

why is there a difference in the formulae for BoP between fixed and floating exchange rates?

Answer 13

to separate intervention from private capital flows.

Question 14

What can be said about a country with a positive current account?

Answer 14

It is a net exporter

Question 15

What is the relationship between KFA and CA?

Answer 15

Since the CA and KFA are linked by the accounting identity, the KFA is basically the flip sign of the CA.

Question 16

When is a country accumulating claims against the rest of the world?

Answer 16

When it has a a positive CA (negative KFA) balance

Question 17

When is a country a net importer?

Answer 17

A country with a negative current account balance is a net importer.

Question 18

What does a negative CA (positive KFA) balance mean?

Answer 18

A negative CA (positive KFA) balance means that the rest of the world is accumulating claims against the country.

Question 19

Why is the CA account important?

Answer 19

One reason why the CA balance is important is that it reflects a country’s net borrowing needs.

For example, the United States ran a CA deficit of USD 470 billion (in 2010). Means that other countries must have lent this amount to the U.S

Question 20

​And what does NIIP stand for?

What is the relationship between CA and NIIP?

And what is the difference?

Answer 20

1) Net International Investment Position
2) CA is related to the changes in NIIP. NIIP means the difference between
- foreign assets owned by home residents, and
- domestic assets owned by foreigners

and is a measure of net foreign wealth of a country.

3) The NIIP refers to a stock while the CA refers to a flow