balance of payments

Examples of balance of payments in the following topics:

• The Balance of Payments

  • The balance of payments (BOP) is a record of all monetary transactions between a country and the rest of the world.
  • The balance of payments (BOP) is a record of all monetary transactions between a country and the rest of the world.
  • Whenever a country receives funds from a foreign source, a credit is recorded on the balance of payments.
  • It includes the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors), and cash transfers.
  • The balancing item is simply an amount that accounts for any statistical errors and ensures that the total balance of payments is zero.

• Finding an Equilibrium Exchange Rate

  • There are two methods to find the equilibrium exchange rate between currencies; the balance of payment method and the asset market model.
  • The balance of payments model holds that foreign exchange rates are at an equilibrium level if they produce a stable current account balance.
  • Like purchasing power parity, the balance of payments model focuses largely on tangible goods and services, ignoring the increasing role of global capital flows .
  • The flows from transactions involving financial assets go into the capital account item of the balance of payments, thus balancing the deficit in the current account.
  • The key difference between the balance of payments and asset market models is that the former includes financial assets, such as stock, in its calculation.

• Reason for a Zero Balance

  • Equilibrium in the market for a country's currency implies that the balance of payments is equal to zero.
  • When a country's balance of payments is equal to zero, there is equilibrium in the market for that country's currency.
  • When a country buys more foreign assets that other countries buy of its assets, this balance is positive and there is a financial account surplus.
  • Because of this, the inflows and outflows of money are equal, creating a balance of payments equal to zero.
  • Discuss the long term equilibrium of a country's balance of payments

• The Global Economy

  • To help countries with unmanageable balance-of-payments problems, the Bretton Woods conference created the International Monetary Fund (IMF).
  • As international financial markets grew more robust and interconnected, some countries ran into severe problems paying their foreign debts, not because of general economic mismanagement but because of abrupt changes in flows of private investment dollars.
  • Often, such problems arose not because of their overall economic management but because of narrower "structural" deficiencies in their economies.
  • It encouraged privatization of state-owned enterprises.
  • The IMF also acknowledged in the late 1990s that its traditional prescription for countries with acute balance-of-payments problems -- namely, austere fiscal and monetary policies -- may not always be appropriate for countries facing financial crises.

• Exchange Rate Policy Choices

  • A government should consider its economic standing, trade balance, and how it wants to use its policy tools when choosing an exchange rate regime.
  • Developing economies often have the majority of their liabilities denominated in other currencies instead of the local currency.
  • Flexible exchange rates serve to adjust the balance of trade.
  • When a trade deficit occurs in an economy with a floating exchange rate, there will be increased demand for the foreign (rather than domestic) currency which will increase the price of the foreign currency in terms of the domestic currency.
  • Under fixed exchange rates, this automatic re-balancing does not occur.

• The Financial Account

  • The financial account measures the net change in ownership of national assets.
  • The financial account (also known as the capital account under some balance of payments systems) measures the net change in ownership of national assets.
  • When financial account has a positive balance, we say that there is a financial account surplus.
  • A financial account surplus means that the net ownership of a country's assets is flowing out of a country - that is, foreign buyers are purchasing more domestic assets than domestic buyers are purchasing of assets from the rest of the world.
  • Likewise, we say that there is a financial account deficit when the financial account has a negative balance.

• Glossary

  • Balance of payments: An accounting statement of the money value of international transactions between one nation and the rest of the world over a specific period of time.
  • Balance of trade: That part of a nation's balance of payments dealing with imports and exports -- that is, trade in goods and services -- over a given period.
  • If exports of goods exceed imports, the trade balance is said to be "favorable"; if imports exceed exports, the trade balance is said to be "unfavorable. "
  • Bond: A certificate reflecting a firm's promise to pay the holder a periodic interest payment until the date of maturity and a fixed sum of money on the designated maturing date.
  • Deficiency payment: A government payment to compensate farmers for all or part of the difference between producer prices actually paid for a specific commodity and higher guaranteed target prices.

• The Current Account

  • The current account represents the sum of the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors), and cash transfers.
  • The balance of trade is the difference between a nation's exports of goods and services and its imports of goods and services.
  • Because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports.
  • The net factor income records a country's inflow of income and outflow of payments.
  • This happens frequently in the case of tourism.

• Arguments for and Against Balancing the Budget

  • Balanced budgets, and the associated topic of budget deficits, are a contentious point within both academic economics and politics.
  • Balanced budgets, and the associated topic of budget deficits, are a contentious point within academic economics and within politics.
  • In the US, every state other than Vermont has a version of a balanced budget amendment, which prohibits some deficits.
  • By balancing deficits in recessions and surpluses in growth, Keynesians believe that the government can obtain the benefits of a balanced budget without facing the risks of making recessions worse due to spending and revenue limitations.
  • John Maynard Keynes founded the Keynesian school, which promotes balanced governmental budgets over the course of the business cycle as opposed to annual balanced budgets.

• Effect of a Government Budget Deficit on Investment and Equilibrium

  • A government's budget balance is determined by the difference in revenues (primarily taxes) and spending.
  • A positive balance is a surplus, and a negative balance is a deficit.
  • The consequences of a budget deficit depend on the type of deficit .
  • Higher spending on transfer payments puts more money into the economy, supporting demand and investment.
  • While automatic stabilizers don't actually shift the aggregate demand curve (because transfer payments and taxes are already built into aggregate demand), discretionary fiscal policy can shift the aggregate demand curve.