Download Chapter 1: The balance of payments: an account of transactions with

Chapter 1: The balance of payments: an account of transactions with the
rest of the world
1. National income accounting for an open economy
1. 2. The nation income identity for an open economy
The GDP of an open economy is therefore the sum of domestic and foreign expenditure on
the goods and services produced by domestic factors of production. Thus, the macroeconomic
identity for an open economy is:
GDP = Y = C + I + EX – IM
(1-1)
with, C, consumption, I, investment, EX, exports and IM, imports.
The Current Account of balance of payments is defined as:
CAB = EX – IM + NY + NTC
(1-2)
with EX, exports of goods and services, IM, imports of goods and services, NY, net income
received from the Rest of the World and NTC, net current transfers. For the moment, we
ignore such incomes and transfers to simplify the discussion.
When a country’s imports exceed its exports, we say the country has a current account deficit.
A country has a current account surplus when its exports exceed its imports. In addition to net
exports of goods and services, the current account balance includes net income received from
the Rest of the World (NY) and net current transfers.
National Account defines GNDY as follows:
GNDY = C + S
GNDY = GDP + NY + NCT
(1-3)
(1-4)
The linkages between National Accounts and Balance of Payments appear in the following
equality:
GNDY = GDP + NY + NCT
C + S = C + I + EX – IM + NY + NCT
(S – I) = CAB
(1-5)
However, we know that:
(S – I) + KAB = CAB + KAB = NLB
where NLB is net lending (+) or borrowing (-) of the total economy. It is equal but of opposite
sign to net borrowing (-) or lending (+) of the rest of the world.
So, finally:
(S – I) + KAB = NLB
(1-6)
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Table 1: Relation between Gross Domestic Product (GDP), Gross National Income and
Gross National Disposable Income (GNY)
Gross Domestic Product (GDP)
+ Compensation of employees receivable from the rest of the world
- Compensation of employees payable to the rest of the world
+ Property income receivable from the rest of the world
- Property income payable to the rest of the world
+ Subsidies receivable from the rest of the world
- Current taxes payable to the rest of the world
Gross National Income1 (GNI)
+ current transfers2 receivable from the rest of the world
- current transfers payable to the rest of the world
Gross National Disposable Income (GNDY)
- consumption of fixed capital at constant prices
Net National Disposable income (NNDI)
1
Gross national income (GNI) represents total primary income receivable by resident institutional units. GNI (at
market price) is conceptually identical with gross national product (GNP) (at market prices).
2
Current transfers include: current taxes on income, wealth etc., social contributions, social benefits and other
current transfers.
1.3. Private and government saving
We define net tax revenue T as the difference between receipts of public authorities (federal,
state, or local governments + Social Security (the National Health Service)) less government
transfer payments:
T = taxes + social security contributions – social transfers – subsidies.
Private saving, denoted SP, can therefore be expressed as:
SP = Y – T – C
(1-7)
Government saving is defined similarly to private saving. The government’s “income” is its
net tax revenue, T, while its “consumption” is government purchases, G. In fact, we define net
tax revenue T as the difference between receipts of public authorities (federal, state, or local
governments + Social Security (the National Health Service)) less government transfer
payments:
T = taxes + social security contributions – social transfers – subsidies.
If we let Sg stand for government saving, then:
Sg = T – G
(1-8)
Private and government saving add up to national saving. Recall that the definition of national
saving, S, as Y – C – G, then:
S = Y – C – G = (Y – T – C) + (T – G) = SP + Sg
Because S = SP + Sg = I + CA, then:
SP = I + CA – Sg = I + CAB – (T – G) = I + CAB + (G – T)
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(1-9)
(1-10)
2. Balance of payments accounts
2.1.2. Examples of paired transactions
1- Purchase of a mobile phone to the Swedish company Ericsson paid with a €1,000 check
paid. Ericsson’s salesperson deposits your check in Ericsson account at Société Générale in
Paris.
Title
Credit (+)
Current Account
Import of goods
Mobile phone purchase
Debit (-)
-€1,000
Financial Account
France asset export
Sale of bank deposit by Société Générale
+€1,000
2- During a travel in Russia, you pay €100 for a diner in a Restaurant in Moscow. You place
the charge on your credit card.
Title
Credit (+)
Current account
German import of services
Meal purchase
Debit (-)
-€100
Financial account
German asset export
Sale of claim on the company issuing your credit card
+€100
3- You buy a newly issued share of stock in the U.K. company British Petroleum (BP) and
you pay with a check of €95 drown on your bank account. BP, in turn, deposits the €95 check
on its own German bank account at Deutsche Bank.
Title
Financial account
German asset import
Your purchase of a share of BP
Credit (+)
Debit (-)
-€95
Financial account
German asset export
BP’s deposit payment at the Deutsche Bank
+€95
4- French banks forgive €5,000 in debt owed to them by the government of the imaginary
country of Sylvania.
Title
Credit (+) Debit (-)
Capital account
France transfer payment
France banks’ debt forgiveness
-€5,000
Financial account
French asset export
Reduction in banks’ claims on Sylvania
+€5,000
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2.2. Detailed presentation of the balance of payments
Table 2: Euro area balance of payments for 2009 (billions of euros)
2008
Credits Debits
1. Current account
1.1. Goods
1.2. Services
1.3. Income
1.4. Current transfers
1,581.0 -1,592.4
500.9
-460.3
565.2
-639.6
88.8
-186.9
2. Capital account
Net lending (+) or borrowing (-) of the total
economy (1 + 2)
3. Financial account
3.1. Direct investment
From the euro area abroad
From abroad toward the euro area
3.2. Portfolio investment
From the euro area abroad
From abroad toward the euro area
3.3. Financial derivatives
3.4. Other investment
3.5. Reserve assets
Base balance (1 + 2 + 3.1 + 3.2 + 3.3)
2009
Balance Credits Debits Balance
-143.3
-11.4
40.6
-74.4
-98.1
1,288.9 -1,252.9
466.3
-435.2
433.9
-466.7
86.7
-178.1
-57.1
36.0
31.1
-32.8
-91.4
10.0
7.6
-133.3
-49.5
163,9
-189,0
76.2
-86.8
-326.5
-299.6
137.5
212.8
350.5
344.0
9.0
-49.2
341.5
393.2
4. Net errors and omissions
(opposite of 1 + 2 + 3)
-65.7
72.0
-3.9
-37.5
13.2
-196.9
2.7
220.9
-30.6
-26.7
(Source: ECB, http://www.ecb.int)
Table 3: Euro Area international investment position end of 2007 (billions of euros)
2007
2008
Assets Liabilities Balance Assets Liabilities Balance
TOTAL
(% of GDP)
Direct Investment
Portfolio Investment
Financial Derivatives
Other investment
Reserve assets
13,907
154.5
3,573
4,632
5,381
347
15,157
168.4
3,131
6,557
5,469
-
-1,250
-13.9
442
-1,925
-26
-88
347
13,312
143.7
3,744
3,764
5,466
374
14,950
161.4
3,217
6,079
5,654
-
-1,638
-17.7
527
-2,315
-36
-188
374
(Source: ECB, http://www.ecb.int)
Table 4: United States international investment position end of 2007 (billions of dollars)
2007
2008
Assets Liabilities Balance Assets Liabilities Balance
TOTAL
(% of GDP)
Direct Investment
Portfolio Investment
Financial Derivatives
Other investment
Reserve assets
-2,140
3,451
6,835
5,156
278
2,450
9,370
6,111
-
(Source: Bureau of Economic Analysis (BEA), http://www.bea.gov)
-4-
1,001
-2,535
71
-955
278
-3,469
3,699
4,244
5,027
294
2,647
8,817
5,429
-
1,052
-4,573
160
-402
294
Table 5: United States balance of payments for 2009 (billions of dollars)
2008
Credits Debits Balance Credits
1. Current account
1.1. Goods
1.2. Services
1.3. Income
1.4. Current transfers
1,277.0 -2,117.3
549.6
-405.3
764.6
-646.4
2. Capital account
Net lending (+) or borrowing (-) of the total
economy (1 + 2)
3. Financial account
3.1. Direct investment
From the United States abroad
From abroad toward the United States
3.2. Portfolio investment
From the United States abroad
From abroad toward the United States
3.3. Financial derivatives
3.4. Other investment
3.5. Reserve assets
Base balance (1 + 2 + 3.1 + 3.2 + 3.3+ 3.4)
-706.1
-840.3
144.3
118.2
-128.3
1,045.5
509.2
561.2
2009
Debits
-1,562.5
-370.8
-472.2
-419.9
-517.0
138.4
89.0
-130.3
1.0
-2.9
-705.1
-422.8
505.2
-12.3
197.7
-68.9
-332.0
-221.0
319.7
152.1
130.7
-190.5
60.8
-221.5
69.9
144.5
Balance
31.0
276.0
4. Net errors and omissions
(opposite of 1 + 2 + 3)
-28.9
420.5
-4.8
252.1
257.3
199.9
n.a.
509.4
-52.3
225.1
(Source: Bureau of Economic Analysis (BEA), http://www.bea.gov)
Table 6: China balance of payments for 2008 (billions of dollars)
Credits
1. Current account
1.1. Goods
1.2. Services
1.3. Income
1.4. Current transfers
1,435
147
91
53
2008
Debits
Balance
-1,074
-159
-60
-7
426
361
-12
31
46
2. Capital account
Net lending (+) or borrowing (-) of the total economy (1 + 2)
3
429
3. Financial account
3.1. Direct investment
From China abroad
From abroad toward China
3.2. Portfolio investment
From China abroad
From abroad toward China
3.4. Other investment
Base balance (1 + 2 + 3)
16
94
-54
148
43
33
10
-121
445
4. Reserve assets
-419
5. Net errors and omissions (opposite of 1 + 2 + 3 + 4)
-26
(Source: State Administration of Foreign Exchange (SAFE),
http://www.safe.gov.cn/model_safe_en/news_en/new_detail_en.jsp?ID=30100000000000000,175&id=2)
-5-
Figure 1-1: Elasticity of World Trade to World Income by Decade
Figure 1-2: Net International Investment Position of the United States at Yearend,
1989-2008
-6-
Figure 1-3: Global imbalances
(Source: World Economic Outlook, IMF, October 2009)
-7-