Week2 balance of payment Flashcards
What is the balance of payments ?
The statistical record of a country international transaction over a certain period of time presented in the form of double entry bookings, where a credit required an equal and offsetting debit entry and vise versa.
What is the 3 elements of actual process of measuring international economy activity ?
Identify what is and what is not a international economic transaction
Understanding how the flow of goods , services , assets , money create debits and credits
Understand the bookkeeping providers for BOP accounting
Explain what are credits and debit
Credits are entries of money in the country balance of payments . Such us uk exports of good , services , goodwill , financial claim and real. Estate . THIS GIVE RISE TO DEMAND FOR POUNDS , appreciation of pound
Debit are entries arise from Uk imports of goods , services , goodwill, financial claims and real estate. THIS GIVE RISE FOR THE SUPPLY OF POUND , depreciation of pound
Explain how the balance of payment is composed
The current account - export , imports of goods and services
Capita account - purchasing or sales of financial and real assets
Statistics discrepancies- residual term due to omitted or mid recorded transactions
The official reserves account - purchase or sale of international reserves asset such as dollar , gold and foreign currency
Explain the current account
The current account is composed by export- imports +- unilateral transfers
Unilateral transfers are foreign aids , reparations , grants and gifts
Exports and imports : goods , services and factor income
Explain how a current account can run a deficit or surplus
If imports > exports running a deficit
If exports > imports running a surplus
If a country is suffered a trade deficit what should do ?
1 - must finance the deficit - by borrowing from foreigners or drawing down on its previously accumulated foreign wealth
Also this implies a reduction in a country net wealth
Explain the capital account
The capital account measures the difference between a country sales of financial and real assets to foreigners and the country purchases of foreign assets.
How the capital account is composed ?
Is composed by foreign direct investment (FDI) , portfolio investments and other investments.
Explain how the capital account influence the currency
So sales of US assets to foreign recoded as credit , giving a raise in demand for dollar resulting in a appreciation
Purchase of foreign asset from US - recoded as debit and also increase supply of dollars in the market so depreciate the currency
Explain official settlement balance (OSB)
OSB- BCA+BKA+Discrepancies
Statistical discrepancy is used for accounting for erros and untraceable monies in a country
OSB indicates a country international payment gap that must be accommodated with government official reserves transactions.
Explain Oficial reserves account
BRA is official reserves held by official monetary authority within a country.
Normally gold , major currencies reserves accounts held at the IMF
ORA Also includes transactions undertaken by central banks to influence foreign exchange rates
More important under a fixed rate regime - as the government assumes the responsibility to maintain parity among currencies by buying or selling its currency in the open market.
Less important under a floating rate regime
If Bop deficit what a country should do ?
a country must take a net payment to foreigners this will result in
Central bank runs down its official reserves assets
And
Central bank can also borrows from foreign governments
explain the balance of payment identity ?
Composed by BCA + BKA +BRA=0
Where we have currency , capital and reserves account
We can see the country performance by looking for the increase or decrease of their official reserves.
Under a flexible exchange rate we have only current and capita account because their compensate each other so
BCA +BKA =0
