Lecture 7
Balance of Payments Accounts

1. Current account

• Trade in goods
• Trade in services
• Net investment income
• Unilateral transfers

1.1 Current account balance (CA)

• CA = X - IM
• If X > IM, current account is in surplus

2. Capital account

• Includes all private capital flows:
  (a) Foreign direct investment
  (b) Portfolio investment

2.1 Capital account balance (KA)

• KA = Capital inflow - Capital outflow
• If capital inflow exceeds outflow, capital account is in surplus

3. Official reserve transactions (ORT)

• Purchase, or sale, of official reserve assets by central banks
• If Malaysian central bank sells yen,
  ORT > 0     (Note the sign!)

4. Balance of payments

• BP = CA + KA
• If BP < 0, balance of payments is in deficit

5. Balance of payments equilibrium

• CA + KA + ORT = 0
• BP = - ORT

5.1 Flexible exchange rates

• BP = 0 (why?)
• CA = - KA
• If current account is in deficit, capital account is in surplus (net capital inflow or outflow?)

5.2 Fixed exchange rates

• CA + KA = - ORT
• If balance of payments is in surplus, central bank is gaining foreign-exchange reserves