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CHAPTER 13: NATIONAL INCOME ACCOUNTING & THE BALANCE OF
PAYMENTS (BOP)
BALANCE OF PAYMENTS
→ The Balance of Payments (BOP) is a statement that records all monetary transactions between
residents of a country and the rest of the world over a given time period
→ Individuals, firms, governments, and government agencies in the reporting/foreign country are
considered residents
→ The BOP's main purpose is to assist the government in developing monetary, fiscal, and trade
policies
Credit transactions (+):
→ Transactions involving the payment of funds from foreign sources
→ Examples: Exports of goods and services, as well as unilateral transfers (gifts or donations)
from foreigners and foreign investment in this country's government bonds/companies
Debit transactions (-):
→ Transactions in which funds are paid to foreign sources
→ Examples: Imports of goods and services, as well as unilateral transfers (gifts or donations) to
foreigners and foreign investment in foreign government bonds/companies
The BOP consists of:
1. Current Account
2. Financial account
3. Capital Transfer Account
4. Unrecorded transactions
1. Current Account
→ Visible trade: Net export and import of goods (tangible items). Purchases of raw materials,
intermediate and finished goods are examples of transactions.
→ Invisible trade: Net export and import of goods (intangible items). Transactions primarily
consists of shipping, IT, banking, and insurance services.
→ Unilateral transfers to and from abroad: Gifts or donations sent by a non-resident relative to a
resident of a country
→ Income receipts and payments: Income earned by South Africans living in other parts of the
world. Rent on property, interest on capital, and investment profits are some examples.
,LECTURE NOTES - WEEK 1
→ Trade deficit: Imports Exports
→ Trade surplus: Imports Exports
→ Current account Net foreign investment
Current account surplus:
→ A country's foreign assets are growing faster than its foreign liabilities
→ Net foreign investment is positive
→ Net lender to Rest of the World (RoW)
→ Stimulates domestic production and income
Current account deficit:
→ A country's foreign liabilities are growing faster than its foreign assets
→ Net foreign investment is negative
→ Net borrower from Rest of the World (RoW)
→ Dampens domestic production and income
2. Capital Transfer Account
→ Separate item reflecting capital transfers payments (typically non-market, non- produced, or
intangible assets like debt forgiveness, copyrights and trademarks)
3. Financial Account
→ Records all financial asset and liability transactions (flows of financial assets)
→ Three main components: Direct investment, portfolio investment and other investment
→ Direct investment: Includes transactions involving the acquisition of share capital in foreign
countries through the establishment of new businesses or through mergers and takeovers
→ Portfolio investment: The purchase of assets such as stocks or bonds by foreigners and South
Africans in South Africa and abroad
→ Other investment: Includes trade credits, loans, currency and deposits, as well as other assets
and liabilities
Financial account inflow:
→ Foreigners make loans to domestic residents by purchasing domestic assets
→ Because the domestic economy gains money as a result of the transaction, domestic assets
sold to foreigners are a credit (+)
, LECTURE NOTES - WEEK 1
Financial account outflow:
→ Domestic citizens lend to foreigners by acquiring foreign assets
→ Because the domestic economy loses money during the transaction, foreign
assets purchased by domestic citizens are a debit (–)
THE NATIONAL INCOME ACCOUNTS
→ Records the value of national income that results from production and
expenditure
→ Gross Domestic product (GDP) is the value of all final goods and services
produced within a country in a given period
→ Gross national product (GNP) is the value of all final goods and services
produced by a nation’s factors of production in a given time period
→ GDP GNP (factor payments from foreign countries) (factor payments to
foreign countries)
→ Net national product (NNP) GNP (depreciation) (unilateral transfers)
(indirect business taxes)
GNP is calculated by adding the value of expenditure on final goods and services
produced:
→ Consumption: Expenditure by domestic consumers
→ Investment: Expenditure by firms on buildings & equipment
→ Government purchases: Expenditure by governments on goods and services
→ Current account balance (exports minus imports): Net expenditure by
foreigners on domestic goods and services
When production domestic expenditure, exports imports:
→ Current account 0 and trade balance 0
→ When a country exports more than it imports, it earns more income from
exports than it spends on imports
→ Net foreign wealth is increasing
When production domestic expenditure, exports imports:
→ Current account 0 and trade balance 0
→ When a country imports more than it exports, it earns less income from
exports than it spends on imports
→ Net foreign wealth is decreasing
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