1. The Balance of Payments
Learning Objectives
• To understand the fundamental principles of how countries measure international
business activity, the balance of payments
• To understand the critical differences between trade in merchandise and services
• To understand how countries with different government policies toward international
trade and investments, or different levels of economic development, differ in their
balance of payments
Introduction
• The measurement of all international economic transactions between the residents of
a country and foreign residents is called the balance of payments (BOP)
• The two major sub accounts of the balance of payments are:
– Current account
– Capital account
– Reserves
Current Account
• I.A. goods, services, and income: 1.Merchandise
• 2. Shipment and other transportation
• 3. Travel
• 4. Investment income
• 5. Other official
• 6. Other private
• B. Unrequited transfers:
• 1. Private
• 2. Officials

2. Capital Account
• II.C. Capital excluding reserves
• 1. Direct investment
• 2. Portfolio investment
• 3.Other long-term, official
• 4. Other long- term, Private
• 5. Other short- term, official
• 6. Other short – term, private
Reserves
• III. D. Reserves
• 1. Monetary gold
• 2. Special Drawing Rights
• 3. IMF reserve position
• 4. Foreign Exchange assets
Balance of payment equilibrium
• Occurs when surplus or deficit is eliminated from the BOP
• Causes for disequilibrium
• 1. National output and National spending
• 2. Money supply
• 3. Exchange Rate
• 4. Interest rate