Balance of Payment Notes

   

 

Balance of Payments (BOP)

In this article we will cover the following topics:

1.     Current account

2.     Financial account

3.     Capital account

4.     Balancing items

5.     Balance of payments equilibrium

6.     Factors affecting BOP

7.     The reason why should we concerned about deficit in capital account

8.     Cycling nature of Current account

9.     Pakistan BOP of 2021 updates

Definition:

The Balance of Payments is a record of a country’s transactions with the rest of the world. It shows the receipts from trade. It consists of the current and financial account.

1. Current account

This is a record of all payments for trade in goods and services plus income flow it is divided into four parts.

  • Balance of trade in goods (visible) e.g toys, machineries etc
  • Balance of trade in services (invisibles) e.g. tourism, insurance.
  • Net income flows. Primary income flows (wages and investment income)
  • Net current transfers. Secondary income flows (e.g. government transfers to UN, EU)

 

Traded Goods + service +Gov income transactions = Current account

2. Financial account

This is a record of all transactions for financial investment. It includes:

  • Direct investment. This is net investment from abroad. For example, if a UK firm built a factory in Japan it would be a debit item on UK financial account)
  • Portfolio investment. These are financial flows, such as the purchase of bonds, gilts or saving in banks. They include short-term monetary flows known as “hot money flows” to take advantage of exchange rate changes, e.g. foreign investor saving money in a UK bank to take advantage of better interest rates – will be a credit item on financial account

 Direct investment + Portfolio investment= Financial account

3. Capital Account

This refers to the transfer of funds associated with buying fixed assets such as land

4. Balancing Item

In practice when the statistics are compiled there are likely to be errors, therefore, the balancing item allows for these statistical discrepancies.

Note the Financial Account used to be called the Capital Account, which is potentially quite confusing. Even now some people refer to financial account as the capital account)

Balance of payments equilibrium

current-account-balance-of-payments

  • In a floating exchange rate the supply of currency will always equal the demand for currency, and the balance of payments is zero.
  • Therefore if there is a deficit on the current account there will be a surplus on the financial/capital account.
  • If there was an increase in interest rates this would cause hot money flows to enter the UK, therefore there would be a surplus on the financial account

The appreciation in the exchange rate would make exports less competitive and imports more competitive therefore with fewer exports and more imports there would be a deficit on the current account.

Factors affecting the balance of payments

A current account deficit could be caused by factors such as.

1.    The rate of consumer spending on imports. For example, during an economic boom, there will be increased spending and this will cause a deficit on the current account.

2.    International competitiveness. If a country experiences higher inflation than its competitors, exports will be less competitive leading to lower demand.

3.    Exchange rate. If the exchange rate is overvalued, it makes exports relatively more expensive leading to a deterioration in the current account.

4.    Structure of economy – deindustrialization can harm the export sector.

Should we be concerned about a current account deficit?

effects-current-account-deficit-flow

 

 Cyclical nature of the current account

In the UK, a current account deficit often increases after a period of economic growth. Higher economic growth leads to higher consumer spending and therefore more spending on imports.

In an economic downturn, spending on imports usually declines leading to a smaller current account deficit.

 Pakistan Balance of payments 2021:-

Key information about Pakistan BOP:

  • Pakistan Current Account recorded a deficit of 3.4 USD bn in Sep 2021, compared with a deficit of 2.5 USD bn in the previous quarter.
  • Pakistan Current Account Balance: USD mn data is updated quarterly, available from Mar 1976 to Sep 2021, with an averaged value of -417.3 USD mn.
  • The data reached an all-time high of 1.4 USD bn in Sep 2002 and a record low of -6.1 USD bn in Jun 2018.
  • CEIC extends history for quarterly Current Account Balance. The State Bank of Pakistan provides Current Account Balance in USD. Current Account Balance prior to Q3 2002 is sourced from International Monetary Fund.
  • Foreign Direct Investment (FDI) increased by 167.6 USD mn in Mar 2021.
  • Pakistan Direct Investment Abroad expanded by 35.0 USD mn in Sep 2021.
  • It’s Foreign Portfolio Investment increased by 879.0 USD mn in Sep 2021.
  • The country's Nominal GDP was reported at 264.1 USD bn in Jun 2020.

 

 

Comments

Post a Comment

Popular posts from this blog

Top 20 Work at Home Transcription Jobs for Beginners and Pros

Top 20 Work at Home Transcription Jobs for Beginners and Pros TRANSCRIPTION Are you looking for ways to earn some money or make that extra cash without too much hustle? Then you should consider  transcription  jobs. General  transcription  is something that anyone can do to earn some money online right from the comfort of your home. What is Transcription? Transcription does involve typing, similar to  data entry . Your role involves listening to a recording or audio file and typing the contents up into a document that would get submitted to the client for review. If you’re interested in a transcription job, I definitely recommend checking out this  Free 7-day course at Transcribe Anywhere ! Requirements In most cases, you will need an updated computer with a strong internet connection. In addition, it is great to have these high-quality  headphones  and  foot pedal . I recommend both to help with speed and production...
Read more

Bookkeeping For A Small Business

Maintaining accounts for any business is not an easy task. Even small businesses, irrespective of their size, pose a challenge because it is difficult to keep track of bills, expenses and sales altogether. Small businesses are often a one-man show, which often making bookkeeping and tracking transactions is pretty tricky.    It is important that small business owners possess at least basic accounting knowledge so as to manage their business better.  Tips for Efficient Bookkeeping The following tips will help for efficient bookkeeping and maintain proper books of account:  Decide on the Method of Bookkeeping   First and foremost, one must determine whether the business will be maintained on a cash system or accrual system of accounting . The cash system is where the transactions are recorded as and when money changes hands. Anyone with a fundamental understanding of accounting can maintain a cash system of accounting. The accrual system, on the other hand is a l...
Read more

Balance of payments

Image
     Balance of Payments (BOP) In this article we will cover the following topics: 1.       Current account 2.       Financial account 3.       Capital account 4.       Balancing items 5.       Balance of payments equilibrium 6.       Factors affecting BOP 7.       The reason why should we concerned about deficit in capital account 8.       Cycling nature of Current account 9.       Pakistan BOP of 2021 updates Definition: The Balance of Payments is a record of a country’s transactions with the rest of the world. It shows the receipts from trade. It consists of the current and financial account. 1. Current account This is a record of all payments for trade in goods and services plus income flow it is divided into four parts. Balance of trade in goods ...
Read more