BOP and International Economic Linkages

Definition:

The balance of payment is a systematic record of all economic transactions between the residents of the reporting country and the residents of foreign countries (the rest of the world) during a given period of time - usually 1 year.

An accounting statement that summarizes all of the economic transactions between residents of the home country and residents of all other countries. One of country and resident of home country do the economic activities such as export, import, transfers payment, loans, short and long term investment. All of transactions that I said before summarized in the balance of payment.

An international economic transaction involves the transfer of title or rendering of service from residents of one country to residents of another country.

The BOP is based on the rule of double-entry bookkeeping in which every credit entry brings about an equal and offsetting debit entry so that debits equal credits and the sum of all transactions equal zero. BOP ini didasarkan pada aturan pembukuan entri ganda di mana setiap entri kredit membawa entri debit yang sama dan offsetting sehingga membebani kredit yang sama dan jumlah seluruh transaksi sama dengan nol.

A credit transaction is one that leads to the receipt of a payment from foreign entities.

A debit transaction leads to a payment being made to foreign entities.

Alternatively, viewed as "sources" and "uses“ of funds, the BOP is a form of flow of funds statement showing changes in assets, liabilities, and net-worth overtime.

In this framework, exports, investment income from abroad, gifts received from abroad, borrowing from abroad, and other credits (e.g., allocation of SDR) are sources of funds.

Imports, investment income paid to foreign residents, gifts sent abroad, lending and investing abroad, and acquisition of international reserve assets (acceptable for final settlement of international debt) are uses of funds.

Atau, dipandang sebagai "sumber" dan "penggunaan" dana, BOP merupakan bentuk aliran dana pernyataan yang menunjukkan perubahan aktiva, kewajiban, dan kekayaan bersih lembur. Dalam kerangka ini, ekspor, pendapatan investasi dari luar negeri, hadiah yang diterima dari luar negeri, meminjam dari luar negeri, dan kredit lainnya (misalnya, alokasi SDR) merupakan sumber dana. Impor, pendapatan investasi yang dibayarkan kepada warga asing, hadiah dikirim ke luar negeri, pinjaman luar negeri dan investasi, dan akuisisi aset cadangan internasional (diterima untuk penyelesaian akhir dari utang internasional) adalah penggunaan dana.

Transactions that generate foreign exchange or foreign currency and credit side will be given a positive sign. On the contrary, spending of foreign exchange transactions will be issued debit side and a negative sign. transaksi yang menghasilkan devisa atau mata uang asing dan sisi kredit akan diberikan tanda positif sebaliknya, transaksi valuta asing akan dikeluarkan sisi debit dan tanda negative.

Contoh:

1. US company decides to sell the swiss francs it received to the federal reserve for dollars. In the case, private assets would have been converted into an official (goverment) liability. This transaction would show up as a credit to the private assets accounts (as it is a source of funds) and debit to the official assets account (as it is of funds).

kami perusahaan memutuskan untuk menjual franc swiss yang diterimanya untuk cadangan federal untuk dolar. dalam kasus ini, aset swasta telah dikonversi menjadi seorang pejabat (pemerintah) kewajiban. transaksi ini akan muncul sebagai kredit ke rekening aset pribadi (karena merupakan sumber dana) dan debit ke akun aset resmi (seperti dana)

The Current Account:

The balance on current account reflects the net flow of goods, services , income, and unilateral transfer. it include exports, imports of merchandise (trade balance), services transactions, (invisibles) and income transfer

Includes trade in goods and services and transfer payments .Transfer payments are gifts made by private and public entities to foreigners, and gifts received from foreign private and public entities.

Exports of goods and services and the receipt of transfer payments are entered as credits because they lead to receipt of payments from foreigners.

Imports of goods and services and the granting of transfer payments are entered as debits because they lead to payments to foreigners.

The Current Account:

saldo pada rekening giro mencerminkan aliran bersih dari barang, jasa, pendapatan, dan transfer unilateral. itu termasuk ekspor, impor barang dagangan (neraca perdagangan) Termasuk perdagangan barang dan jasa dan pembayaran transfer. Pembayaran transfer adalah hadiah yang dibuat oleh badan swasta dan publik untuk orang asing, dan hadiah yang diterima dari perusahaan swasta dan publik asing. Ekspor barang dan jasa dan penerimaan pembayaran transfer dimasukkan sebagai kredit karena mereka menyebabkan penerimaan pembayaran dari orang asing. Impor barang dan jasa dan pemberian pembayaran transfer dimasukkan sebagai debet karena mereka mengakibatkan pembayaran kepada pihak asing.

Capital account

Record transfers that offset transactions that are undertaken without exchange in fixed assets or in their financing (such as development aid)

Financial account

Transactions affect a nation’s wealth and net creditor position. These transactions are classified as portfolio investment, direct investment, and other investment or reserve assets.

Portfolio investment: purchases of financial assets with a maturity greater than one year (purchase of foreign stocks and bonds)

Direct investment: if investors directly get ownership of foreign business. In example, if one foreign company establishing their factory in Indonesia, or foreign company buy Indonesian company. Then direct investment happen.

Other investment: Example of other investments includes short term investment such as, bank deposit, instrument of money market, and so on. This investment commonly, sensitive to level of interest and currency.

Balances of payment measures

There are several balance of payments definitions

Basic balance: focuses on transactions considered to be fundamental to the economic health of currency. It includes the balance on current account and long term capital.

Net liquidity balance: Measures changes in private domestic borrowing or lending required to keep payments in balance without adjusting official reserves. It includes the basic balance plus short-term private non-liquid capital balance, the allocation of SDR and errors and omissions.

The Official Reserve Transactions Balance: Measures the adjustment required in official reserves to achieve balance of payments equilibrium. The assumption here is that official transactions are different from private transactions.

*** International Economic Linkages (59-72)

Define:

NI = National Income (or National Product)

C = Consumption

S = Savings

National Income is either spent on consumption or saved, so

NI= C + S ........ (1)

Similarly, the amount that a nation spends on goods and

services (National Expenditure), E, can be divided into

Consumption (C) and Real Investment, Id (Plant & Equipment,

R&D, etc). Hence:

NS = C + Id ........ (2)

(1) - (2) gives

NI - NS = S - Id ........ (3)

If a nation's income exceeds its spending, then savings will exceed domestic investment resulting in surplus capital. Excess capital must be invested overseas: Thus:

S - Id = If ........ (4)

Net Foreign Investment (If) equals the nations' net public and private capital outflows plus increase in official reserves.

A nation that produces more than it spends, NI- NS > 0, will save more than it invests domestically, S - Id > 0, and will have a net capital outflow.

The capital outflow, If > 0, will appear as some combination of a capital account deficit and an increase in official reserves.

This identify says that if a nation’s income exceeds its spending, saving will exceed domestic investment, yielding surplus capital. The surplus must be invested overseas (if it were invested domestically there would not be a capital surplus). In other words, saving equals domestic investments plus net foreign investment (S=I+NFI). Net foreign investment equals the nation’s net public and private capital outflow plus net capital transfers. The net private and public capital outflow equals the financial account deficit if the outflow is positive (a financial account surplus if negative). The net increase in capital transfers equals the balance in the capital account. Ignoring the minor impact of the capital account, excess savings equals the financial account deficit. Alternatively, national saving deficit will equal the financial account surplus (net borrowing from abroad) this borrowing finances the excess of national spending over national income

Mengidentifikasi ini mengatakan bahwa jika pendapatan suatu negara melebihi pengeluaran, tabungan akan melebihi investasi domestik, menghasilkan modal surplus. Surplus tersebut harus diinvestasikan di luar negeri (jika diinvestasikan dalam negeri tidak akan ada surplus modal). Dengan kata lain, tabungan sama dengan investasi domestik ditambah investasi asing neto (S = I + NFI). Investasi asing neto sama dengan arus keluar neto bangsa modal publik dan swasta ditambah transfer modal bersih. Arus modal keluar neto swasta dan publik sama dengan defisit neraca keuangan jika keluar adalah positif (surplus akun keuangan jika negatif). Kenaikan bersih dalam transfer modal sama dengan saldo rekening modal. Mengabaikan dampak kecil dari neraca modal, tabungan berlebih sama dengan defisit neraca keuangan. Atau, defisit tabungan nasional akan sama dengan surplus neraca keuangan (pinjaman bersih dari luar negeri) pinjaman ini membiayai kelebihan pengeluaran nasional selama pendapatan nasional