The Balance of Payments

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The Balance of Payments
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Definition

• Accounting system measuring all economic
  transactions between the residents of one country
  and the rest of the world

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Categories

• credits capital inflows ()
• debits capital outflows (-)

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Note

• By now, the BOP should be balanced, that is,
• Current Account Capital Account Official
  Reserve Balance 0

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What if still unbalanced?
Use an old accounting trick
The Fudge Factor
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Exemplification

• 1. Canada loans C 1 m to Haiti for 10 years by
  creating a C 1 m deposit with a Toronto Bank.
• 2. A Canadian firm sells 1 m worth of wheat to
  Haiti. The wheat is paid from the deposit created
  from the loan.
• 3. A Canadian receives C 0.04 m in interest
  from the German bonds she owns. The C0.04 m is
  deposited in a German bank.
• 4. A Canadian tourist travels to Germany and
  spends C0.04 m
• 5. Canada gives C0.8 m worth of humanitarian
  aid to Somalia.

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Exemplification

• 1. Canada loans C 1 m to Haiti for 10 years by
  creating a C 1 m deposit with a Toronto Bank.
• 2. A Canadian firm sells 1 m worth of wheat to
  Haiti. The wheat is paid from the deposit created
  from the loan.
• 3. A Canadian receives C 0.04 m in interest
  from the German bonds she owns. The C0.04 m is
  deposited in a German bank.
• 4. A Canadian tourist travels to Germany and
  spends C0.04 m
• 5. Canada gives C0.8 m worth of humanitarian
  aid to Somalia.

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Exemplification

• 1. Canada loans C 1 m to Haiti for 10 years by
  creating a C 1 m deposit with a Toronto Bank.
• 2. A Canadian firm sells 1 m worth of wheat to
  Haiti. The wheat is paid from the deposit created
  from the loan.
• 3. A Canadian receives C 0.04 m in interest
  from the German bonds she owns. The C0.04 m is
  deposited in a German bank.
• 4. A Canadian tourist travels to Germany and
  spends C0.04 m
• 5. Canada gives C0.8 m worth of humanitarian
  aid to Somalia.

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Exemplification

• 1. Canada loans C 1 m to Haiti for 10 years by
  creating a C 1 m deposit with a Toronto Bank.
• 2. A Canadian firm sells 1 m worth of wheat to
  Haiti. The wheat is paid from the deposit created
  from the loan.
• 3. A Canadian receives C 0.04 m in interest
  from the German bonds she owns. The C0.04 m is
  deposited in a German bank.
• 4. A Canadian tourist travels to Germany and
  spends C0.04 m
• 5. Canada gives C0.8 m worth of humanitarian
  aid to Somalia.

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Exemplification

• 1. Canada loans C 1 m to Haiti for 10 years by
  creating a C 1 m deposit with a Toronto Bank.
• 2. A Canadian firm sells 1 m worth of wheat to
  Haiti. The wheat is paid from the deposit created
  from the loan.
• 3. A Canadian receives C 0.04 m in interest
  from the German bonds she owns. The C0.04 m is
  deposited in a German bank.
• 4. A Canadian tourist travels to Germany and
  spends C0.04 m
• 5. Canada gives C0.8 m worth of humanitarian
  aid to Somalia.

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Everything balances out

• 1 0.8 0.04 1 0.04 0.04 0.8 1
  0.04 1