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Week 11: The Balance of Payments and its Interpretations

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Camilo Jimenez

on 10 October 2017

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Transcript of Week 11: The Balance of Payments and its Interpretations

Camilo Jiménez
The Balance of Payments and its implications + Foreign Exchange Market
Balance of Payments
What is that?
Double-Entry Accounting
The arrangement of international transactions

Credit transactions

• Merchandise exports
• Transportation and travel receipts
• Income received from investments abroad
• Gifts received from foreign residents
• Aid received from foreign governments
• Investments in the United States by overseas residents
Debit transactions

• Merchandise imports
• Transportation and travel expenditures
• Income paid on the investments of foreigners
• Gifts to foreign residents
• Aid given by the U.S. government
• Overseas investment by U.S. residents
Balance-of-Payments Structure
Current Account
Statistical Discrepancy: Errors and Omissions
Capital and Financial Account
Refers to the monetary value of international flows associated with transactions in goods, services, income flows, and unilateral transfers.
Capital and financial transactions in the balance of payments include all international purchases or sales of assets.

The term assets is broadly defined to include items such as titles to real estate, corporate stocks and bonds, government securities, and ordinary commercial bank deposits.
The data-collection process that underlies the published balance-of-payments figures is far from perfect.

When statisticians sum the credits and debits, it is not surprising when the two totals do not match. Because total debits must equal total credits in principle, statisticians insert a residual to make them equal. This corrected entry is known as statistical discrepancy, or errors and omissions.
What Does a Current Account Deficit (Surplus) Mean?
If the current account registers a deficit (debits outweigh credits), the capital and financial account must register a surplus, or net capital/financial inflow (credits outweigh debits).
Is a Current Account Deficit a Problem?
It depends. A deficit indicates a shortage of liquidity which must be satisfied through the capital account. The point is to identify what will the country do with the debt incurred. Wasting money or investing money?
Norway provides an example of one of these productive opportunities. In the 1960s, rich petroleum deposits were discovered in the North Sea. Norway was one of the major beneficiaries of this discovery. Getting to these valuable oil and gas deposits required large and repeated investments in off-shore oil platforms, transport pipelines, ships, and helicopters.
Business Cycles, Economic Growth, and the Current Account Norway
Is it possible to indefinitely continue with current account deficits?
It depends. Is it possible to be financed indefinitely? There is an increased share ownership of local capital in the hands of foreigners.
1. To hold a deficit will occur when foreigners maintain their investments in the local country.
2. To have an increase in the efficiency and technology
3. To implement policies that stimulate growth abroad → Increased demand for foreign securities.
4. To promote increased national saving -> Increased domestic investment -> Increased exports
All this leads to the total account in the balance of payments should ALWAYS be balanced. There is no concept of deficit or surplus in the balance of payments
Net exports of goods and services
Payments and capital income
Net income (dividends and interest) of local overseas

 Unilateral transfers
 Private transfers
 Government transfers
What should the government do?
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