Chap003__Balance of Payments.ppt

(S – I) + (T – G) ≡ X – M ≡ BCA This shows that there is an intimate relationship between a country’s BCA and how it finances its domestic investment and pays for government spending. If (S – I) 0, then a country’s domestic savings is insufficient to finance domestic investment. Similarly, if (T – G) 0, then tax revenue is insufficient to cover government spending and a government budget deficit exists. Relationship between Balance of Payments and National Income Accounting 3-* (S – I) + (T – G) ≡ X – M ≡ BCA When BCA 0, government budget deficits and/or part of domestic investment are being financed by foreign-controlled capital. To reduce a BCA deficit, one of the following must occur: For a given level of S and I, the government budget deficit (T – G) must be reduced. For a given level of I and (T – G), S must be increased. For a given level S and (T – G), I must fall. Relationship between Balance of Payments and National Income Accounting 3-* This chapter serves to introduce the student to the balance of payments. How it is constructed and how balance of payments data may be interpreted. * Copyright ? 2012 by the McGraw-Hill Companies, Inc. All rights reserved. Balance of Payments Chapter Three Chapter Outline Balance of Payments Accounting Balance of Payments Accounts The Current Account The Capital Account Statistical Discrepancy Official Reserves Account The Balance of Payments Identity Balance of Payments Trends in Major Countries 3-* Balance of Payments Accounting The balance of payments is the statistical record of a country’s international transactions over a certain period of time presented in the form of double-entry bookkeeping. Note: When we say “a country’s balance of payments” we are referring to the transactions of its citizens and government. 3-* Balance of Payments Example Suppose that Maplewood Bicycle in Maplewood, Missouri, USA imports $100,000 worth of bicycle frames from Mercian Bicycles in Darby, England. There will exist a $100,000