This chapter covers the measurement and interpretation of all international transactions between one country and the rest of the world: that is, the balance of payments. The main goals of the chapter are to: Explain how the double-entry bookkeeping system of measuring Balance of Payments (BOP) works with reference to the IMF standard balance of payments, outline the specifics of Australia’s balance of payments, establish the importance of BOP for international companies.
Chapter 10 The balance of payments Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–1 Lecture plan • Definition of balance of payments • The IMF standard presentation • The current account • The capital and financial account • The double-entry system; examples of records • Australia’s balance of payments • Comparative current account balances Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–2 The balance of payments (BOP) • Record of the value of all the economic transactions between – residents of one country (e.g individuals, firms, governments) and – residents of all other countries during a given time period Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–3 The balance of payments (BOP) cont • Double-entry bookkeeping system • For nations with floating currencies, the entire balance of payments by definition must numerically balance, while individual accounts or subaccounts may not balance Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–4 The standard IMF presentation • Current account • Capital and financial account Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–5 Current account International transactions involving goods and/or services, income and current transfers Main items: Goods and services (a) goods (5 items) (b) services (11 items) Income (a) compensation of employees (b) investment income (e.g FDI profits, other) Current transfers (payments in cash and kind by residents to non-residents) Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–6 Capital and financial account The country's transactions in monetary and ownership claims Capital account (a) capital transfers (e.g involving transfers of ownership of fixed assets); general government and other (b) acquisition/disposal of non-produced, non-financial assets (e.g intangibles, such as patented entities, leases, goodwill) Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–7 Capital and financial account cont Financial account (a) direct investment (b) portfolio investment (c) other investment (e.g trade credits, loans, currency and deposits, other) (d) reserve assets Net errors and omissions Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–8 Imports of goods Item/ Commodity Debit (B$ million) 1–A1 Goods 10.0 Oil imports 2–B3b Other investment Credit (B$ million) 10.0 Decreases in S-T foreign assets held by residents Source: Exercise 1, p.243 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–9 Imports of services Item/ Commodity 1–A21 Transportation services Debit (B$ million ) Credit (B$ million) 1.0 Payments for freight services 1.0 Decrease in S-T foreign assets held by residents 2–B3b Other S-T investment Source: Exercise 2, p.243 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–10 Investment income Item No/Name Debit (B$ million) Credit (B$ million) 1–B2 Investment 4.0 Profits of income FDI in Bucksland 2–B1 Direct 2.0 Increased investment investment in Bucksland enterprises 2–B3b Other S2.0 Decreases in T investment S-T domestic Source: Exercise 3, p.243 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea liabilities 10–11 Current transfers Item/ Commodity Debit (B$ million) 1–C1 Current transfers 0.5 Payment in kind to nonresidents 1–A1 Goods Credit (B$ million) 0.5 Food exports Source: Exercise 4, p.244 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–12 Direct investment Item No/ Name Debit (B$ million) 2–B1 Direct investment Credit (B$ million) 14.0 Increased investment in foreign enterprises 1–A1 Goods 7.0 Exports to nonresident destinations 2–B3b Other S-T 7.0 Decreases in S-T foreign assets held by residents investment Source: Exercise 5, p.244 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–13 Other investment Item/ Commodity Debit (B$ million) Credit (B$ million) 2–B3a 9.0 L-T loans by Other non-residents investment to residents (L-T) 2–B 3b Other 9.0 Increases in investment S-T foreign (S-T) assets held by residents Source: Exercise 6, p.244 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–14 Bucksland’s BOP balances Debit (B$ million) Credit (B$ million) 10 + 0.5 + Balance on G & S 11 7.5 1–B Income 1–A Goods and services Balance on G&S & income 15 1–C Current Transfers 0.5 Current Account Balance (1A + 1B + 1C) 15.5 Source: adapted from Table 10.2 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 7.5 7.5 CAD = B$8.0 m 10–15 20 03 -0 03 20 02 - 02 20 01 - 01 20 00 - 00 19 99 - 99 19 98 - 19 97 - 98 Australia’s current account balance by component, $A million, 1997–98 to 2003–04 -5 000 -10 000 Net goods -15 000 Net services -20 000 Net income* -25 000 CAB -30 000 * Includes net current transfers -35 000 -40 000 Source: adapted from Reserve Bank, Bulletin, Table H Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–16 Australia’s current account deficit as % of GDP, 1991–2003 -1 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 % of GDP -2 -3 -4 -5 -6 -7 Source: OECD, Economic Outlook No.76/2004 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–17 Comparative current account balance in selected economies, $US b., % of GDP Economy $US billion US % of GDP - 530.7 -4.8% Japan 136.2 3.2% Australia - 30.2 - 5.9% New Zealand - 3.3 -4.2% China 45.9 3.2% H Kong, China 16.7 10.7% Singapore 28.2 30.9% Republic of Korea 12.3 2.0% Malaysia 13.3 12.9% Source: based on IMF data (World Bank source for Malaysian GDP) Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10–18 ... GDP -2 -3 -4 -5 -6 -7 Source: OECD, Economic Outlook No.76/2004 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. .. m 10 15 20 03 -0 03 20 02 - 02 20 01 - 01 20 00 - 00 19 99 - 99 19 98 - 19 97 - 98 Australia’s current account balance by component, $A million, 1997–98 to 2003–04 -5 000 -1 0 000 Net goods -1 5... Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 10 7 Capital and financial account cont Financial account (a) direct investment (b) portfolio investment