Week 1: National Income Accounting and Balance of Payments Flashcards
Balance of payments
Record of ALL international trade and financial transactions
made by a country’s residents for a given period of time (a
year).
The official settlements balance, or the balance of payments measures the balance of funds that central
banks use for official international payments.
What is the point of double entry book-keeping?
Each transaction has two items, one credit (+) and one debit
(-) entry, of equal value, thus B.O.P should sum to zero.
What is credit?
Money flow into country.
Sets up basis for a payment by a foreigner into the country.
Creates a monetary claim on a foreigner.
What is debit?
Sets up basis for a payment by the country to a foreigner
Creates a monetary claim owed to a foreigner
Credit items?
- Exports of goods
- Purchases by foreign tourists travelling in this country
- Foreigners investing in this country’s government bonds
Debit items?
- Imports of goods
- Purchases by firms in this country of consulting services from
providers located in other countries - Purchases by investors in this country of the equity shares of a
foreign company from the foreigner who previously owned the
share
What’s included in the current account? (HINT: Mother Creatively Makes Nice Icy Slushies)
Merchandise exports Net gold exports Service receipts Income receipts Merchandise imports Current transfers
Balance on current account can be a surplus or deficit
What’s in the capital transfer account?
Separate item reflecting transfers payments of a capital nature (typically non-market, non-produced, or intangible assets like debt forgiveness, copyrights and trademarks).
What’s in the financial account?
Records all financial asset and liability transactions (flows of financial assets).
Three main components: direct investment, portfolio investment and other investment
How is the balance on the financial account represented?
Inflows (credit +): foreigners loan to domestic citizens by acquiring domestic assets
Outflow (debit -): domestic citizens loan to foreigners by acquiring foreign assets
Besides the current, financial and capital transfer accounts, what are 2 other accounts adding to B.O.P?
- Unrecorded transactions
- Net gold and reserves and other foreign reserves owing to BOP transactions (CA balance + Capital transfer account + financial account balance) (EG: SDR allocations and valuation adjustments - before SARB tries to use its own reserves it will try and gain assistance from the IMF or other central banks)
How would this BoP payment reflect?
- A South African imports a desktop computer for R5000from Saratoga.
- Saratoga deposits your check in a South African bank.
+ Credit current account by R5000 (RSA good import - Computer)
- Debit financial account by R5000 (RSA asset sale - Bank deposit)
Show how this transaction would reflect in BoP:
- A South African buys a pizza in Italy and pays R200 with a credit card.
- Italian pizza shop receives payment from your credit card company.
- Debit current account by R200 (Foreign service import)
+ Credit financial account by R200 (Sale of credit card claim, RSA asset sale)
Show how this transaction would reflect in the BoP:
- A South African buys a share of Mascom Wireless worth R1500.
- Mascom Wireless deposits the money into a South African bank.
- Debit financial account by R1500 (Stock purchase=RSA asset purchase)
+ Credit financial account by R1500 (Bank deposit= RSA asset sale)
What are official (international) reserve assets?
foreign assets (E.G. gov. bonds, currency, gold and accounts at the IMF) held by the central bank to help dampen financial instability.
