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Balance of Payments
Outflows Inflows
What is the Balance of Payments?
• The balance of payments is a record of all economic transactions between a country and the rest of the world.
• Countries trade with each other and will make and receive payments.
• In the Caribbean when:• payments are made foreign currencies flow out of the country
(outflows).• payments are received foreign funds flow into the country
(inflows).
Sub-accounts of the Balance of Payments?
Balance of Payments
Current Account
Visible/merchandise
balance
Invisible/ services balance
NPI blanace
Current TXFRS balance
Capital Account
Official balance (Gov.t)
Private Balance
Direct Investments
Financial portfolio investments
Hot money
Official Reserves
CURRENT ACCOUNT
Outflows Inflows
Current Account
• The current account records income and expenditure on goods and services, income and expenditure on property income (or factor rewards) and current transfers.
Outflows Inflows
Current Account
• It consists of:• The visible balance. • This is the difference between exports and imports of
goods.• It is also called the merchandise balance or trade in
goods or Balance of Trade.
Outflows Inflows
Current Account
• Services balance• This accounts for the imports and exports of services. • These services include air and sea transport services,
communication services, construction services, insurance and financial services.
• Also called the Invisible Balance.
Outflows Inflows
• Net Property Income Balance• The difference between income earned by locals
from property abroad (dividends on shares, rent from land and so on) and income paid to foreign property earners.
Current Account
Outflows Inflows
• Current Transfers Balance• This refers to all unilateral payments or receipts
between a country and the rest of the world such as remittances and inheritances.
Current Account
CAPITAL ACCOUNT
Outflows Inflows
Capital Account• These records all movement of capital flows from both private as
well as government sources.
The Official Balance of the Capital Account
• This covers:• borrowing from abroad to finance Government
expenditure which is an inflow• repayment of existing external public debt which is an
outflow.
The Private Balance of the Capital Balance
• This covers capital funds (for financial and physical assets) transferred from one country to another through private sources.
The Private Balance of the Capital Balance
• It includes:• Foreign Direct Investment – when a foreign firm
purchases and operates a business in a foreign country
The Private Balance of the Capital Balance
• It includes:• Financial Portfolio Investment – when a foreign firm
purchases shares and bonds in a domestic economy.
Hot Money Balance of the Capital Balance
• This is money held by international investors in search of the most attractive interest rate of short term financial investments.
• It includes treasury bills and certificates of deposits.
OFFICIAL RESERVES
Outflows
Inflows
Official Reserves
• Once the sum of the capital account and current account is not equal to zero there will be a change in the official reserves.
• If the sum is greater than zero there will be a surplus, which will be added to the official reserves.
Outflows
Inflows
Official Reserves
• If the sum is less than zero there will be a deficit, which will reduce the official reserves.
