Chapter 13 Balance of Payments

7/31/2019 Chapter 13 Balance of Payments

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Chapter 13 Balance of

Payments

BALANCE OF PAYMENTSACCOUNTING

For most countries the method of balanceof payments accounting is generally thesame and follows similar accountingprinciples. We will be focusing specifically

on the principles used by South Africa forbalance of payments accounting and if youlike you can compare this the United

States’ balance of payments in your



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The balance of payments iscomprised of two main accounts: the

current account and the financialaccount. The current account recordsall imports and exports of goods and

services and the financial accountrecords all South Africa’s financialtransactions with the rest of the

world.



All international transactions caneither be classified as debit or

credit entry.Debit – involves payments toforeigners

Credit – involves receipts of payments from foreigners

CURRENT ACCOUNT

Exports (+) Imports (-)

FINANCIAL ACCOUNT

Exports (+) Imports (-)



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If money comes into the country itis considered an export whether it

is recorded in the current orfinancial account. Example, SouthAfrica sells goods to consumers inGermany, its an export, because

the German consumers have to paySouth Africa for the good. Likewise,if an American company invests inSouth Africa, money is entering thecountry so it is also considered an



If any money leaves the country, itis considered an import. If a SouthAfrican company purchases inputsfrom the UK, it is an import

because money will leave thecountry. Similarly if South Africagrants a loan to a UK company, it is

also an import as money leaves thecountry.

We will use the South African

balance of payments to explain the



Current AccountCurrent Account

Merchandise exports, includes thetrade in all physical, tangible goods,both of raw materials as well asintermediate and final goods. Net goldexports are shown separately in theSouth African balance of payments. Thisis because gold is purchased by central

banks as part of the foreign exchangereserves of a country and because SouthAfrica is one of the world’s major goldproducers.



CA CA The current account also records tradein services under service receipts.

These include but are not limited to

services such as transportation, travel,construction services, financial andinsurance services, business andprofessional, recreational services and

government services.Income receipts refer to incomeearned by South African residents inthe rest of the world. This is dividedinto two categories namely:



Merchandise imports, payments forservices and income payments, arecalculated on the same basis as

merchandise exports, service receiptsand income receipts respectively. Thedifference is that the flows are out of

the country instead of into thecountry.Current transfers refer to whenSouth Africans receive money, goods

or services without having to provide



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All these items yield the balance in thecurrent account, which can either be in

a deficit or a surplus. A surplus meansthat the total exports of goods andservices exceed the imports and viceversa for a deficit.

By only using net gold exports,merchandise imports and merchandiseexports we can calculate the tradebalance.



Capital A/cCapital A/c

Capital transfer account This is a separate item just reflecting

transfers payments of a capital nature

Financial account The financial account records all financialasset and liabilities transactions. It has threemain components: direct investment,

portfolio investment and otherinvestment.

Direct investment includes transactions

related to the acquisition of share capital inforei n countries b establishin new



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Portfolio investment refers to thepurchase of assets such as shares orbonds between foreigners and SouthAfricans in South Africa and abroad.Other investment includes all financial

transactions that do not fall under theprevious three categories. It includestrade credits, loans, currency anddeposits and other assets and liabilities.For example, a South African importermy finance her transaction through the

use of credit obtained abroad.



Adding net direct investment, net portfolioinvestment and net other investment, yields

the financial account balance.

Unrecorded transactionsBy assumption, using the double entry

system, summing the debit and creditentries should equal the change in grossgold and other foreign reserves. In practicethis does not happen and represent all thetransactions that have taken place in theinformal sector.

Adding the current account, capital transferaccount and financial account balances and



unrecorded transactions yield the

change in the country’s net goldand other foreign reservesowing to balance of payments

transactions. To calculate the change in grossgold and other foreign

reserves, we need to factor in twomore amounts, the change inliabilities related to reserves andSDR allocations and valuationad ustments.



The significance of the last two itemson the balance of payments is thatbefore the South African Reserve Bank(SARB) uses its own reserves, it will try

and obtain assistance from theInternational Monetary Fund (IMF) orother central banks or governments.

When the IMF was established, it wasrequired that all central banks keepminimum reserves with the IMF.

Special Drawing Rights or SDRs



problems with their balance of payments, they may apply to

exchange these SDRs with the IMFfor convertible currency.

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Chapter 13 Balance of Payments