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.