Macroeconomics

Chapter 35

The Balance of Payments

* Balance of payments accounts: A summary record of a country’s transactions with the rest of the world, including the buying and selling of goods, services, and assets. Each transaction is classified according to whether the transaction generates a payment or a receipt for Canada.

* Receipt = Credit. Payment = Debit.

* Two main categories to the balance of payments: the current account and the capital account.

The Current Account

* The current account records transactions arising from trade in goods and services. It also includes net investment income earned from foreign asset holdings. The current account is divided into two main sections:

* 1) Trade account records payments and receipts arising from the import and export of goods, such as computers and cars, and services, such as legal or architectural services. (Tourism constitutes a large part of the trade in services.)

* 2) Capital-service account records the payments and receipts that represent income on assets.

The Capital Account

* The capital account records international transactions in assets, including bonds, shares of companies, real estate, and factories.

* When Canadians purchase foreign assets, financial capital is leaving Canada and going abroad, and so this is called a capital outflow.

* When Canadians sell assets to foreigners, financial capital is entering Canada from abroad, and so this is called capital inflow.

* The capital account distinguishes between direct investment and portfolio investment.

* The official financing account is included as part of the capital account because official reserves are assets rather than goods or services.

* Gov’t can increase or decrease its reserves buy selling or buying foreign-currency assets.

* Surplus in the capital account means there was a net capital inflow of this amount.

The Balance of Payments Must Balance

* The current account balance...