The document discusses balance of payments (BoP), which is a statistical record of a country's international transactions presented as double-entry bookkeeping. Transactions resulting in receipts from foreigners are recorded as credits, while payments to foreigners are debits. Three cases of international transactions between companies and banks are presented to illustrate how credits and debits are recorded in the BoP accounts. The document also outlines the components of the current account, capital account, and official reserve account that make up a country's BoP. An example is given showing the US had a current account deficit in 2009.

1. U N D E R S T A N D I N G - A N A L Y S I S - I N T E R P R E T A T I O N
BALANCE OF PAYMENT

2. INTRODUCTION
• The statistical record of a country’s international
transactions over a certain period of time presented in
the form of double-entry book-keeping.
• In BoP, any transaction resulting in a receipt from
foreigners is recorded as a credit, with a positive signforeigners is recorded as a credit, with a positive sign
• any transaction resulting in a payment to foreigners is
recorded as a debit, with a minus sign

3. CASE #1
• The Boeing Corporation exported a Boeing 747 aircraft
to Japan Airlines for $50 Mn, and that Japan Airlines
pays from its dollar bank account kept with Chase
Manhattan Bank in New York City. Then, the receipt of
$50 Mn by Boeing will be recorded as a credit (+), which$50 Mn by Boeing will be recorded as a credit (+), which
will be matched by a debit (-) of the same amount
representing a reduction of the U.S. bank’s liabilities.

4. CASE #2
• Boeing imports jet engines produced by Rolls-Royce for
$30Mn and that Boeing makes payment by transferring
the funds to a New York bank account kept by Rolls-
Royce. In this case, payment by Boeing will be recorded
as a debit (-), whereas the deposit of the funds by Rolls-as a debit (-), whereas the deposit of the funds by Rolls-
Royce will be recorded as a credit (+).

5. CASE #3
• Ford acquires Jaguar, a British car manufacturer, for
$750 Mn and Jaguar deposits the money in Barclays
Bank in London, which, in turn, uses the sum to purchase
U.S> treasury notes. In this case, the payment of $750 Mn
by Ford will be recorded as a debit (-) whereas Barclaysby Ford will be recorded as a debit (-) whereas Barclays
purchase of the US Treasury notes will be recorded as a
credit (+)

6. ACCOUNT
Transactions Credit Debit
Boeing’s export + $50 million
Withdrawal from US Bank - $50 million
Bowing’s import - $30 million
Deposit at US bank + $30 millionDeposit at US bank + $30 million
Ford’s acquisition of Jaguar - $750 million
Barclays’ purchase of US securities +$750 million
Balance of Payment $ 830 million $ 830 million

7. COMPOSITION
• A country’s international transactions can be grouped
into three main categories:
• The current account
• The capital account
• The official reserve account• The official reserve account

8. THE CURRENT ACCOUNT
• It includes
• Exports and imports of goods
• Exports and imports of services
• Divided into four subcategories:
• Merchandise trade• Merchandise trade
Represents exports and imports of tangible goods,
• Services
Receipts and payments for legal, engineering, consulting and
other performed services and tourist expenditures
• Factor income
Payments and receipts of interest, dividends and other income
on previously made foreign investments
• Unilateral transfers
Unrequited payments such as gifts, foreign aid, and reparations

9. THE CAPITAL ACCOUNT
• It includes:
• All purchases and sales of assets such as stocks, bonds,
bank accounts, real estate and businesses
• Divided into three sub-categories:
• Direct investment• Direct investment
Acquisitions of controlling interests in foreign businesses
• Portfolio investment
Investments in foreign stocks and bonds that do not involve
acquisitions of control
• Other investment
Includes Bank deposits, Currency investment, Trade credit etc

10. THE OFFICIAL RESERVE ACCOUNT
• It includes:
• All purchases and sales of international reserve assets, such
as dollars, foreign exchanges, gold and SDRs.
• Computing the cumulative balance of payments
including the current account, capital account, and theincluding the current account, capital account, and the
statistical discrepancies, we get overall balance or
official settlement balance
• It is indicative of a country’s BoP gap that must be
accommodated by official reserve transactions.
• If a country must make a net payment to foreigners
because of a BoP deficit, the country should run down its
official reserve assets such as gold, foreign exchanges
and SDRs or borrow a new from foreigners.

11. ANALYSIS WITH AN EXAMPLE
• US exports were $2116 Bn in 2009 while US imports were
$2405.6 billion. The current account balance, which is
defined as exports minus imports plus unilateral transfers,
that is, (1) +(2) + (3) was negative -$419.8 Bn. The US thus
had a balance-of-payments deficit on the currenthad a balance-of-payments deficit on the current
account in 1009. the current account deficit implies that
the United States used up more output than it produced.

12. CONTD.
Credit Debit
Current Account
1. Exports 2116.0
1.1 Merchandise 1050.0
1.2 Services 504.81.2 Services 504.8
1.3 Factor Income 561.2
2. Imports -2405.6
2.1 Merchandise -1562.7
2.2 Services -370.7
2.3 Factor Income -472.2
3. Unilateral transfer 19.2 -149.4
Balance on Current Account (1 + 2 + 3) -419.8

13. CONTD.
Credit Debit
Capital Account
4. Direct investment 152.1 -221.0
5. Portfolio investment 376.6 -549.4
5.1 Equity securities 141.9 -68.65.1 Equity securities 141.9 -68.6
5.2 Debt securities 234.7 -480.8
6. Other investment 616.3 -93.5
Balance on capital account (4 + 5 + 6) 281.1
7. Statistical Discrepancies 192.8
Overall balance 52.2
Official Reserve Account -52.2

14. INTERPRETATION
• A country can run BoP surplus or deficit by increasing or
decreasing its official reserves.
• Under the fixed exchange rate regime , the combined
balance on current and capital accounts will be equal
in size, but opposite in sign, to the change in the officialin size, but opposite in sign, to the change in the official
reserves. Under the pure flexible exchange rate regime
where the central bank does not maintain any official
reserves, a current account surplus or deficit must be
matched by a capital account deficit or surplus.

15. PRACTICE QUE.
1. Define Balance of Payments.
2. Why would it be useful to examine a country’s balance-of-
payments data?
3. Comment on the statement: “Since the United States imports
more than it exports, it is necessary for United States to importmore than it exports, it is necessary for United States to import
capital from foreign countries to finance its current account
deficits.”
4. Explain how a country can run an overall balance-of-
payments deficit or surplus.
5. Explain official reserve assets and its major components.