OE - Balance of Payment Accounts Lesson

APMAC_Lesson_TopBanner.png

Balance of Payment Accounts

Introduction

InternationalEconomics_BOP.png BOP (Balance of Payments) is an accounting of a country’s international transactions by individuals, firms and government agencies for a specific time period (quarter or year).

Money coming IN is a credit (b/c you sell domestic goods or assets)
Money going OUT is a debit (b/c you buy foreign goods or assets)

All transactions cause a credit and a debit (credit in one country and debit in the other) or alternatively a buy for 1 country is a sell for the other.

BOP is comprised of two major accounts:

  1. Current account
  2. Financial account

 

Balance of Payment Accounts

A country’s balance of payments accounts is a summary of all of the country’s transactions with other countries. There are two important accounts within the balance of payments: the current account and the financial account (also known as the capital account). The current account records a nation’s exports and imports of goods and services, and also includes net investment income and net transfers. The financial account records the difference between a country’s sale of assets to foreigners and its purchase of assets from foreigners. The balance of payments is essential for making sense of a nation’s position in the global economy.

  • Current Account - The current account records a nation’s exports and imports of goods and services. It also includes net investment income (U.S. earnings on investment abroad minus foreign earnings from capital invested in the United States) and net transfers (e.g., foreign aid sent to other countries and funds that immigrants send to family abroad).
  • Financial Account - The financial account records the flows of money from the purchase and sale of assets domestically and abroad. For example, U.S. investors might buy a hotel building in Tokyo or shares of stock in a Swedish company while foreign investors might buy a factory in the United States or stock in a U.S. company. Foreign assets are bought and sold using currencies purchased on foreign exchange markets. The financial flows recorded in the financial account are part of the loanable funds market. Foreign investors provide funds that are used to purchase assets, which mean they supply loanable funds. Changes in the supply of loanable funds affect the equilibrium real interest rate in the loanable funds market, which then affects a country’s investment, aggregate InternationalEconomics_positivenegative.png demand, output, employment, and price level.

Positive or Negative

When classifying a transaction, consider whether a country uses (loses) or earns (gains) foreign currency. If the international transaction uses foreign currency to complete the transaction, it is a debit (negative). If it earns foreign currency, it is a credit (positive).

 

BOP Transactions

All BOP transactions impact the foreign currency markets for the participants. When you buy (sell domestic) foreign goods or assets you must have foreign (domestic) currency to complete the exchange.

Watch the presentation below to learn more about the balance of payment accounts.

 

Financial Account Transfers

Financial account transfers may impact the loanable funds markets of the participants. These capital flows include direct investment, purchases of stocks and bonds and central bank purchases of assets. Capital inflows will increase the supply of loanable funds; capital outflows will decrease the supply of loanable funds.

Watch the video below to learn about financial account transfers.

 

 

Need to know more? Click here to download a handout from the College Board. Links to an external site.

 

Review

Review what you have learned by completing the activity below.

 

In Summary . . .

What's Your takeaway? Icon

  • BOP is an accounting of a country’s international transactions by individuals, firms and government agencies for a specific time period (quarter or year) Money coming in is a credit (b/c you sell domestic goods or assets) Money going out is a debit (b/c you buy foreign goods or assets)
  • All transactions cause a credit and a debit (credit in one country and debit in the other) or alternatively a buy for 1 country is a sell for the other. BOP is comprised of two major accounts.
  • Current account – includes merchandise trade, services, interest and dividend income, and one-way transfers = CA
  • Financial account – includes financial assets (stocks, bonds) and direct foreign investment (businesses, real estate). This account tracks U.S. owned assets abroad and foreign owned assets in the U.S. = FA

 

 

APMAC_LessonBottomBanner.png IMAGES CREATED BY GAVS