Economics
BOP Current Account
The BOP (Balance of Payments) Current Account is a record of a country's transactions with the rest of the world in goods, services, income, and current transfers. It reflects the nation's net income from abroad and its net trade balance. A surplus in the current account indicates that the country is earning more from exports than it is spending on imports.
Written by Perlego with AI-assistance
Related key terms
1 of 5
9 Key excerpts on "BOP Current Account"
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
Historically there have been different approaches to the question of how to correct imbalances and debate on whether they are something governments should be concerned about. With record imbalances held up as one of the contributing factors to the financial crisis of 2007–2010, plans to address global imbalances are now high on the agenda of policy makers for 2010. Composition of the balance of payments sheet Standard definition Since 1974, the two principal divisions on the BOP have been the current account and the capital account. The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. It is the sum of the balance of trade (net earnings on exports – payments for imports) , factor income (earnings on foreign investments – payments made ____________________ WORLD TECHNOLOGIES ____________________ to foreign investors) and cash transfers. Its called the current account as it covers transactions in the here and now - those that don't give rise to future claims. The capital account records the net change in ownership of foreign assets. It includes the reserve account (the international operations of a nation's central bank), along with loans and investments between the country and the rest of world (but not the future regular repayments / dividends that the loans and investments yield, those are earnings and will be recorded in the current account). Expressed with the standard meaning for the capital account , the BOP identity is: The balancing item is simply an amount that accounts for any statistical errors and make sure the current and capital accounts sum to zero. At high level, by the principles of double entry accounting, an entry in the current account gives rise to an entry in the capital account, and in aggregate the two accounts should balance.
eBook - ePub101 Things Everyone Needs to Know about the Global Economy
The Guide to Understanding International Finance, World Markets, and How They Can Affect Your Financial Future
- Michael Taillard(Author)
- 2012(Publication Date)
- Adams Media(Publisher)
CHAPTER 3 Balance of PaymentsExports leave one country and imports enter another country; ownership of capital assets is exchanged time and again across the globe. All of this happens in varying quantities and prices, and for each nation it is recorded and added up in a huge record called the balance of payments.The balance of payments, often referred to as the BoP, is a detailed accounting of the value of all international transactions for a country. It is broken down into three primary elements: the current account , the capital account , and the transfer payments account . The transactions relevant to each account are then further classified according to the type of goods or services being exchanged.- The current account includes all imports and exports of goods and services. Within the current account are such categories as manufactured and assembled goods, and services.
- The capital account includes all transfers of capital ownership. Within the capital account are reserve assets, foreign direct investment, and any other form of ownership stake that a foreign nation might hold in another country’s economic well-being.
- The transfer payments account deals with those transactions in which goods or capital are given freely to others without compensation. This account is sometimes referred to as the balancing account.
The primary principle of the balance of payments is that it must always (as the name implies) balance. This happens through a process similar to double-entry accounting: Each international transaction influences the value of two BoP accounts for each nation. Any time one of the accounts in the balance of payments changes value, a different account changes in value by the same amount but in the opposite direction. For example, if the current account increases by $35 million, then one of the two remaining accounts (capital or transfer payments) must decrease by $35 million.On a smaller scale, of course, this happens in any transaction. For instance, when you buy a $35 bottle of gin, you receive the gin bottle in what would be a current account transaction. You now possess a bottle of gin that increases by $35 your net worth in goods. You give the store owner $35 in cash, a capital account transaction (you’re effectively transferring some of your capital to the liquor store owner) that decreases your available capital by $35. If, by some miracle, the store owner decides to simply give you the gin, then the transaction represents a decrease in the transfer payments account and an increase in your current account, thus balancing the BoP (this is the reason the transfer payments account is sometimes called the balancing account).
eBook - ePubInternational Financial Transactions and Exchange Rates
Trade, Investment, and Parities
- I. Kallianiotis(Author)
- 2013(Publication Date)
- Palgrave Macmillan(Publisher)
CHAPTER 1 The Balance of Payments and Exchange RateIn our open economies, domestic residents can engage in a variety of international transactions involving the purchase or sale of goods, services, and assets. US residents buy European cars and US airplane manufacturers sell commercial jets to Australian airlines. Vineyards in California purchase the services of Mexican workers, while American universities sell their educational services to Saudi Arabian students. At the same time, US investors open Swiss bank accounts, and US multinational corporations are raising funds by selling stocks and bonds to foreign investors (Chinese and Japanese). These are the legal transactions that the balance of payments (BoP) intends to register. BoP accounts are an accounting record of all monetary transactions that have taken place during a given period between a country and the rest of the world.1These transactions include payments for the country’s exports and imports of goods, services, financial capital, and financial transfers. The BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency of the country concerned. The BoP accounting system reveals whether countries are in surplus or deficit on trade or capital transactions with the rest of the world. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or investment in foreign countries, are recorded as negative or deficit items.When all components of the BoP accounts are included, they must sum to zero with no overall surplus or deficit (BoP = 0). Thus, the BoP is always in balance. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways, such as by funds earned from its foreign investments, by running down central bank reserves, or by receiving loans from other countries.
eBook - ePubInternational Competitiveness, Investment and Finance
A Case Study of India
- A Ganesh-Kumar, Kunal Sen, Rajendra Vaidya(Authors)
- 2003(Publication Date)
- Taylor & Francis(Publisher)
3The balance of payments and national competitiveness
National competitiveness can be defined as the ‘ability to produce goods and services that meet the test of international competitiveness, while (the country's) citizens enjoy a standard of living that is both rising and sustainable’ (Tyson 1992, p. 1). Thus, a competitive country is one that is able to produce tradable goods that are in sufficient demand both in home and overseas markets such that trade will be in balance without the country having to continuously depreciate its currency or to operate at a level of activity below its potential (Howes and Singh 2000). Clearly, large and persistent deficits in the country's current account are one important indicator of structural problems with respect to the country's relative competitiveness, though such deficits may also be caused by macroeconomic disequilibrium or inappropriate exchange rate policies. Large current account deficits often trigger balance of payments (BOP) crises for developing countries and may necessitate the use of adjustment measures such as a contraction in aggregate demand in the country in question or large exchange rate adjustments. For a developing country that is attempting to pursue high rates of economic growth, such a growth strategy could lead to widening current account deficits and effectively constrain the long-run growth rate of the economy. A higher long-run growth rate that is consistent with a sustainable BOP situation is only possible with a rapidly growing export sector. As we have argued in Chapter 1 , given that agricultural commodities often face declining prices in world markets, the manufacturing sector must necessarily be the leading sector in the country's export drive. Therefore, the key policy issue at the national level is how to increase the international competitiveness of the country's manufacturing sector.The purpose of this chapter is threefold. In Section 3.1 , we provide a brief overview of the evolution of India's external sector for the period 1970–98, focussing on the current account, the trade balance and the real exchange rate (RER). In this section, we also look at some summary measures of the Indian manufacturing sector's international competitiveness. In Section 3.2 , we develop a theory of BOP-constrained growth derived from Thirlwall (1979) for application to India. This theory will allow us to examine the relative importance of world income growth and movements in the RER in explaining India's BOP-constrained equilibrium growth path. We estimate this model using annual data for 1960–98 and then seek to establish whether the economic reforms of 1984 and 1991 have had any effect on this equilibrium growth path. In Section 3.3 , we examine trends and patterns in India's aggregate competitiveness using the constant market share (CMS) methodology. This methodology will enable us to see whether India's export sector has been moving towards the more rapidly growing commodities and/or markets, which would be a clear indication of the increasing international competitiveness of the country's tradable sector. Section 3.4
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
balance of payments. In the 1960s and 1970s, the negative capital account balance outweighed the pos-itive current account balance. Starting in the early 1980s, the situation reversed, and the current account deficit outpaced the capital account surplus. With the end of the Bretton Woods system in the early 1970s, foreign offi-cial acquisition of U.S. assets dominated the OSB, mainly because the Fed and the Treasury Exchange Fund did not extensively intervene in the foreign exchange market, whereas a number of foreign central banks actively intervened. National Income Accounting and the Components of the Balance of Payments The Relationships Among the Current Account, the Capital Account, and GDP The familiar relationship Y=C + I+G + X-M, (1) represents the income = expenditures equilibrium condition for the national economy, where Y = GDP, C = personal consumption expenditure, / = gross physical investment expenditure, G -government purchases, X= exports, and Μ = imports. Equation 1 says that the national economy is in equilibrium if the value of production, Y, equals the value of expenditure for that production, C + I+G + X-M. Because exports are domestically produced goods and services sold to foreign residents, the expenditure side of the equation includes exports with a positive sign. On the other hand, imports are subtracted from the expenditure side of the expression. This occurs as a result of the way the national income and product accounts conventionally define C, /, and G to include expenditure for foreign-produced goods as well as expenditure for domestically produced goods. For example, personal consumption, C, includes not only expenditure by domestic consumers for domestically manufactured automobiles, but also expenditure by domestic consumers for automobiles manufactured in Japan, Korea, and Germany, for example.
eBook - PDF- Henk Jager, Catrinus Jepma(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
Weak quality of data . This is thought to be a particular problem in terms of transporta-tion services and workers’ remittances from abroad. Underreporting of investment income . Partly as a result of tax evasion capital export is underreported, while the presence of offshore centres disrupts the reporting of international capital flows and its income flows in general. 11.4 Balance-of-payments analysis The use of the double-entry bookkeeping system means that the balance of payments as a whole is always in formal equilibrium, in bookkeeping terms: the total of the credit items is always equal to the total of debit items. This also means that the balance for 206 Introduction to International Economics a sub-part of all transactions should be equal to the reverse of the balance of all other transactions booked on the balance of payments. If, for instance, a country has a current account deficit of $2 billion, there will be a corresponding combined financial-and capital-account surplus of $2 billion for the country in the reporting period. The most important sub-balance is the current account balance , a figure that shows the net income that a country obtains from its international transactions. As we will see in Chapter 14, a country may have a level of domestic spending that is lower than its level of national production, thereby creating a surplus on its current account. For less developed countries, such restrictions of domestic spending may be regarded as undesirable. This explains why poor countries will often have current account deficits. Such current account deficits are financed by a net inflow of foreign capital (associated with a net sale of financial assets abroad). In other words, the country borrows from other countries or spends its foreign asset holdings. (Unless it is the capital account that offsets the current account deficit.) As a result, there will be a decline in the country’s financial wealth.
eBook - PDFTrading Economics
A Guide to Economic Statistics for Practitioners and Students
- Trevor Williams, Victoria Turton(Authors)
- 2014(Publication Date)
- Wiley(Publisher)
And that is not always clear-cut. For example, one of the positives of having a cheap currency is that it can encourage investors to switch production to your economy, as exports from your country are cheaper than those from other countries they could locate in. THE CONCEPT OF THE BALANCE OF PAYMENTS The UK’s balance of payments measures its transactions with the rest of the world. It is one of the most important of the data releases each month and has been known to bring down governments, or at least it has been accused of helping them to lose elections. The balance of payments helps to determine the value of the currency and therefore helps to determine domestic prices of goods and services. It directly impacts living standards, employment and the ability of the country to pay its way in the world and for its people to maintain their standard of living. By measuring economic transactions between the UK and the rest of the world, the balance of payments shows how the net flow of the 200 Trading Economics balance of goods and services between inward and outward activities is funded. It encompasses: ∙ Exports and imports of visible goods, such as cars, food, medicines, capital goods and machinery. ∙ Exports and imports of services such as travel, financial, legal and education. ∙ Net flows of income between the UK and the rest of the world, such as interest earned on investment here and abroad, equity returns, dividends and so on. ∙ Flows such as investment in companies and plant and machinery in the UK and outside by UK firms. ∙ Transfers such as those that take place when migrants in the UK send funds overseas and UK migrants abroad send money back to people in the UK. These are all netted out to show the balance position. What does this mean exactly? Table 7.1 gives an example that follows this trail. In theory, any business transaction must have two sides to it – one thing is exchanged for another of equal value.
eBook - PDF- Harms, Philipp(Authors)
- 2016(Publication Date)
- Mohr Siebeck(Publisher)
The „primary current account“ pr t CA reflects the sum of net exports, net foreign labor income and the balance on the secondary income account, and the capital account balance is set equal to zero for simplicity. Using lower-case letters to denote variables relative to GDP and defining the growth rate of real GDP as t t t Y Y g / 1 1 1 , we can rewrite the above expression as assets t t liab t assets t t t t liab t t pr t t t b g r r b g g r g ca b b 1 1 1 1 1 1 1 1 This equation demonstrates that the evolution of the net international in-vestment position (as a share of GDP) depends on the primary current ac-count, the difference between the yield on liabilities and the output growth rate times the initial NIIP, and the difference between returns on assets and the return on liabilities. The latter difference weighs stronger if the stock of foreign assets is larger. This decomposition demonstrates that a country which manages to combine high returns received on its assets with low returns paid on its liabilities can afford high primary current account defi-cits and still avoid large drops of its net international investment position. 42 II The Balance of Payments II.2.4 Gross Domestic Product, Gross National Income, and the Current Account A country’s Gross Domestic Product (GDP) represents the output – more spe-cifically, the value added – produced by domestic persons, firms and institu-tions during a specific time interval. 14 The goods and services that make up total output can be used for different purposes: they can be consumed , they can be used for investment – with investment denoting expenses that raise an econ-omy’s capital stock and thus future productive capacity – and they can be ex-ported to the rest of the world.
eBook - ePub- International Monetary Fund(Author)
- 1996(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
681 . In concept, an IIP statement is similar to a balance sheet, which shows the assets, liabilities, and net worth of an economic unit at a particular point. However, there is an important difference between an economy’s net international investment position and an economy’s net worth. An economy’s holdings of nonfinancial assets, which are not measured in the international investment position, are also included in the calculation of an economy’s net worth. For most economies, the value of nonfinancial assets far exceeds the value of claims on nonresidents (plus SDRs and monetary gold).682 . There is a close relationship between the international investment position and the balance of payments. The BOP financial account measures an economy’s transactions in external financial assets and liabilities. Obviously, these transactions have an impact on the stock of external financial assets and liabilities measured in the international investment position. However, over time, there are other factors (such as price changes) that also cause changes in stock values; the impact of these other factors is also reflected in the international investment position.683 . The international investment position is also closely related to the investment income component of the BOP current account . Investment income consists of income accruing on external financial assets and liabilities. If all other things are equal, the greater the stock of external financial assets and liabilities, the greater the investment income accruing on these financial assets and liabilities.31684 . There is also an indirect relationship between the BOP current account and the international investment position. Because of the double entry nature of the balance of payments, the current account balance must be offset by an equivalent balance (with opposite sign) in the capital and financial account . 32 As the financial account impacts directly upon the international investment position, to the extent that the financial account offsets the current account balance, the current account
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
