Calculating balance of payments (1 Viewer)

[vanessahidayat]

how do u calculate the balance of payments account both current and capital financial accounts?

 

[munchiecrunchie]

the balance on the balance of payments = 0 .

 

[sasa-o8]

^ What they said.

 

[Mother Man]

Why the balance of payments = 0

Why does the BoP must equal 0? i know it has something to do with the floating exchange rate of Australia, but i need some clarification

thanks

 

[williamc]

Re: Why the balance of payments = 0

Simply, under a floating exchange rate such as australia, the quantity supplied of aussie bucks must equal the quantity demanded, as there has to be equilibrium. This relates to the BOP as money coming out of australia or the supply of aussie dollars on the Current account has to equal the money coming into australia or the demand for aussie dollars on the capital and financial account.

So if the BOP don't balance then the exchange rate will equalise to make it balance.

because remember: CA + capital and financial account + statisitical errors and ommisions = 0.

.

 

[bfox]

supply $A = demand $A

M + income/transfer debits + savings outflow = X + income/transfer credits + savings inflow

M - X + income/transfer (debits -credits) = savings (inflow - outflow)

negative current account balance = positive capital and financial account balance

current account + capital & financial account = 0

 

[gnrlies]

Best way of thinking about it is NOT in terms of currency. this is just confusing, although it does provide a very superficial explanation. It also provides a solution of how dynamic economy will adjust in order to balance the BOP but this is not something you need to know in HSC economics.

The best way of thinking about it, is in terms of an analogy using your household income. I.e. consider the following example. I will define what each item in my example is equivalent to before I give it:

CA

G+S Exports = Income from a job
G+S Imports = Purchases of consumables
Income Inflows = dividends from savings in a bank
Income Outflows = Interest payable on credit card

K&FA

Financial Inflows = purchasing something on a credit card
Financial Outflows = repaying the principal on a credit card



Lets say in week one you earn $100 in income from a job. Lets say you then purchase $110 worth of goods. Obviously you do not have enough income to pay for these goods so you have to get the money from somewhere else. So, you pay for $100 with your income, and the other $10 with your credit card.

Notice how in context to the BOP equivalents above it balances to zero? (i.e. CA = -10, K&FA=+10)

In the next week, you earn $100 and now have to pay $1 in interest repayments (lets assume 10% interest on the $10 owing on the credit card). Because you dont want to increase your level of debt, you only spend $99 on goods and services.

Notice again how both accounts are equal (in fact both accounts are zero because nothing has changed on the K&FA). (i.e. CA = 0, K&FA=0)

In week three the household earns $100 and now wants to pay off the credit card. So they only spend $90 on goods, and repays $10 on the credit card.

Notice how both accounts, once again - sum to zero. (i.e. CA = +10, K&FA = -10)










This is exactly what happens on our balance of payments however it is of course much more complicated.... I think this example helps people to understand how it works a whole lot better. The currency thing is the theoretical reason, but few students correctly conceptualise what is an abstract concept.

 

[seano77]

Increased imports and decreased exports leads to a higher CAD. This will increase the supply of the AUD, therefore the exchange rate depreciates. At the same time, investment coming into Australia will now be worth comparatviely more because of the depreciation.
Thus, the negative balance on the current account equals the positive balance on the capital and financial account. Which equals zero.
(Also, don't forget net errors and ommissions.)