Balance of payment slideDone by Mrs. James Barnett

Balance of Payment (To be used with the BOJ handout)A record of a countrys transaction with the rest of the world during a specific period of time, it shows the countrys payments and receipts from its trade. It consists of a current account and a capital and financial account. It is concerned with transactions and thus deals with flows rather than stocks.

Accounts in the BOPThere are three accounts in the BOP:1. The current account2. The capital account3. The official financing accountNB. In some cases only 2 A/cs are used current account and capital account.

The Current AccountMeasures the flow of spending on goods and services. This shows how much a country gained or lost from trade.

It is the most important account as it tells how competitive a country is internationally and the extent to which it is living within its means.

Components of the current account:1. The visible trade balance/ merchandise trade balance The difference between import and export of tangible goods. This consists of manufactured goods, raw materials and food items such as coffee, banana, etc.

2. Invisible trade balanceThis is the difference between the import and export of services as well as incomes from investment. Eg. Air travel, services, tourism, shipping, insurance, banking profits and dividends.

3. The Net Property Income BalanceShows the net income flow related to the compensation or rewards for the factors of production used or rendered between one country and the rest of the world.

Therefore if production takes place in one country but the factors are owned by another country. The profits will be repatriated. Eg the British Petroleum Subsidiary in T&T. This would be an outflow.

An inflow occurs when nationals of a country have shares in a foreign company eg. T& T the local company having shares in Sagicor. This is an inflow for T&T.

4. Current TransfersDonations gifts and inheritance.The difference between the receipt and disbursements. (Remittances from abroad).

Capital AccountShows the movement of capital flows. Inflow (credit) and outflow (debit).

Capital include fixed assets (land and equity in companies) and financial assets (bonds and treasury bills)

Movement of capitalThis may be short term - this is also called hot money as it can change at any time ie you can deposit and withdraw at will. (private - buying shares on the New York Stock Exchange to earn greater interest, for govt. subscriptions to the IMF and WB).

long term (private buy shares in a company; govt loans made by the WB)

Official Financing AccountCalculates the total currency flow ie the balance on the current account plus the total investments and other capital flows, plus the balancing figure.

Balancing figure - if you have more outflows than inflow (deficit) you can finance this by taking out a loan or using money in reserve.

With a surplus The surplus goes to the reserve account.

Current AccountGoodsServicesIncomeCurrent TransfersCapital and Financial AccountCapitalCapital transfersAcquisition/ Disposal of non-produced, non-financial assets.Financial AccountsBalance of Payment Account

When u have a current account deficit u may end up with a capital account surplus. For instance the money we use to import goods from USA is used by USA companies to invest in JA.Current account -USA X>M (surplus) Capital a/c (deficit outflow of investment)Current a/c JA X

1. Current AccountA. Goods Balance-xx Exports xx Imports -xxB. Services Balancexx Transportationxx Travelxx Other services xxC. IncomexxD. Current transfersxx Official xx Privatexx2. Capital and Financial A/CxxA. Capital A/CxxB. Financial A/Cxx Other official investmentxx Other private investmentxx ReservesxxBalance of payment disequilibrium

QuestionExport of Coffee to the USA, $300Procured IT services from India, $20MMoney transfer from aunt living in the Cayman Islands, $100MJamaica sells land to China, $120

Balance of Payment A/C

CURRENT A/C 500Export of coffee to USA 300Procured con. From India -20Money transfer Aunt in Cay 100Ja. Sell land to China 120 CAPITAL/FINANCIAL A/C -500Money in from USA Coffee (fin) -300Money paid out to India (fin) 20Money in from Cayman (fin) -100Money in from China (capital) -120

Balance of payment disequilibriumpersistent trade imbalancepersistent current account imbalancepersistent positive or negative overall balance

Causes and consequences of BOP disequilibria

Current account surplus expanding sector can result in an appreciation of the currency. Other sectors may contract as they become less competitive. One booming sector makes the currency so strong that the other industries are less competitive. Eg oil in T&T and remittances for Jamaica.

Misaligned Relative Prices the currency may be overstated. If foreign goods are relatively cheaper then consumers are likely to buy them leading to a current account deficit.

Overheating Economy Domestic production cannot support AD. So the country has to import to fill the orders. Eg. Importing bananas to fill orders abroad. This leads to a deficit.

Persistent fiscal deficit short term loans and long term loans increases. The short term pay back is more critical.

Narrowing of IR differentials People may choose to invest abroad to earn greater IR.

Persistent negative OB NIR declines - If IR is attractive people will invest in bonds instead of produce to sell to earn foreign exchange. Instability in the FX market leads to a decrease in money supply, IR increases, GDP falls, no insurance fund , start borrowing from the IMF.

Persistent Positive OB NIR increases MS increases, IR falls, Inflation increases competiveness declines increased sterilization.

Policy response to BOP crisis

Devaluation/ depreciating the currency makes exports cheaper compared to imports.Expenditure switching these attempts to make imports relatively more expensive than exports by using tariffs and devaluing the currency.

Expenditure Reducing reduce government spending (deflate the Economy). To do this government could increase taxation rates, cut its own spending or increase IR.Fiscal measures decrease the fiscal deficit by spending less and /or increase taxes.Monetary policies increase the IR to encourage savings, encourage savings, reduce domestic investment and reduce inflation, govt. can also sell bonds.

Policy PackagesA combination of policies can be used to cure a BOP deficit eg. Depreciation will result in consumers switching from imports to exports but, if Jamaica industry is at or near full capacity it cannot produce enough and result in inflation. The government might deflate the economy (expenditure reducing) to provide capacity for depreciation (expenditure switching). Both policies are complementing each other.

Deficit and Surplus Problems and Solutions