Professional Documents
Culture Documents
Econ. 315
Chapter 2:
Balance of Payments
3. The period
Usually a calendar year, however most of the
countries keep a record on a quarterly basis (e.g.,
Kuwait).
* Income Account
Investment Income ( current income received & paid on international
investment )
FINANCIAL ACCOUNT
--Records international borrowing, lending, purchases, and sales of assets--
* Direct investments
* Portfolio investment
* Other investments
assets)
Foreign exchange ( foreign currency reserves)
foreigners)
The payment itself is entered as a capital outflow (debit), why?
When Kuwait agrees to wait for three months for payments, it extends a credit
to foreign importers (capital outflows). This is an increase in domestic assets
abroad (i.e. a debit)
Credit)+(
OIL EXPORTS
CAPITAL OUTFLOWS (an increase in
Kuwaiti assets abroad)
Debit)-(
500
500
Example 2. Kuwaiti tourists visit London and spend $ 200 mn. on hotels,
meals.. etc. Note the following:
Kuwaiti tourists purchased services from foreigners (require payments to
foreigners). This is similar to imports (debit).
The payment is entered as a credit, as it represents an increase in foreign
claims on Kuwait, i.e. an increase in foreign assets in Kuwait or a capital
inflow to Kuwait.
Credit (+)
Travel services purchased from foreigners
Capital inflow (a rise in foreign assets in Kuwait)
Debit (-)
200
200
Example 3. Kuwait gives a $ 100 mn. bank balance to the government of a less
developed country (aid). Note the following:
This unilateral transfer is a debit (requires payments to foreigners).
The payment (an increase in a bank account) itself represents an increase in
foreign claims (of assets) in Kuwait.
Credit (+)
Unilateral transfers (aid)
Capital inflow
Debit (-)
100
100
Example 4. A Kuwaiti resident purchases foreign stocks of $ 400 mn. and pays
for it by increasing foreign bank balances in Kuwait. Note the following:
The purchase of foreign stocks increases Kuwaiti assets abroad. This is a
capital outflow (debit).
The payment is an increase in foreign assets in Kuwait. This is a capital
inflow (credit).
(Note: If the Kuwaiti resident paid for the foreign stock by reducing bank
balances abroad; the payment will be a reduction in Kuwaiti assets abroad,
this is also a capital inflow and thus is a credit).
Credit
(+)
Debit (-)
400
400
Credit (+)
Debit (-)
300
300
Debit (-)
500
-------500
200
100
200
------500
Autonomous transactions.
All transactions in the current account and capital account are
called autonomous, because they take place for business or
profit motives (except for unilateral transfers), and are
independent of BOP considerations.
They are sometimes called the items above the line
Transactions in official reserves.
They are called accommodating transactions (items below the
line), because they are needed to balance international
transactions.
Below the line items form the official reserve account, and its
balance is called the official settlements balance.
Do you know now what do we mean by the line?