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Economics 4 - CIIA

balance of payments, exchange rates, prices and interest rates

balance of payments, exchange rates, prices and interest rates

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Cartes-fiches 28
Langue English
Catégorie Economie politique
Niveau Autres
Crée / Actualisé 20.04.2014 / 13.03.2015
Attribution de licence Non précisé
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balance of payments

country's transactions with the rest of the world. 

It reproduces the flows of goods and services, incomes, transfers 

and capital.

the accounting system 

currency inflows are recorded as credits (+) and currency

outflows as debits (-). transactions are recorded through 

double-entry book keeping. balance of payments (BP) always

balances (total debits = total credits, BP=0).

which three major components does it include ?

the current account (CB) - records payments for traded goods and services, foreign

investment income and unilateral transfers.

the capital account (KA) - reports public and private investment and lengin activities.

official reservce account (ΔRA) - records changes in the cental bank's holdings of 

foreign currencies. 

each of these components may have a deficit or a surplus. 

However, the sum of these parts is balanced, so the change in the 

reserve account must equal the sum of CB and KA. 

BP = CB + KA - ΔRA = 0


If ΔRA = 0 - CB and KA balances have to sum up to zero

CB + KA = 0

balance of payments (BP) = A + B + C + D + E + F = 0

A = Merchandise trade balance

B = Services trade balance (A+B = NX)

C = Net factor income (NIRA)

D = Net unilateral transers

E = capital account balance

F = official reserve transactions balance (-ΔRA)

BP = A + B + C + D + E + F = 0 (total debit = total credit)

capital account (KA)

records cross-border changes in holdongs of shares, property, bank deposits

and loans, bonds. One distinguish between long-term and short-term capital flows. 

What are short-term and long-term investments ?

- long-term is foreign direct investment. acquisition of assets abroad with a view

of controlling the management. corporate takeovers, establishment of subsidiary production facilities

or purchases of foreign property. 

- short-term is mainly speculative purchases and sales of financial assets.

nominal exchange rate S is the price of one unit of foreign currency in 

terms of domestic currency.

SCHF/USD=0.88254, this way of quoting is said in American terms

or in direct terms.

European (indirect) terms is the inverse, the price of a unit of

domestic currency in units of foreign currency. 

SUSD/CHF = 1.13309.

In interbank market, European terms are conventionally used 

for all currency quotations except the British pound and the

Australian and New Zealand dollars. 

However the norm in theoretical analysis is in American terms.

What are the participants in foreign exchange market?

- exporters who have foreign currency sales

- importers who have to pay for goods and services in for. currency

- portfolio managers who purchase and sell for. cur. assets and rec.

for. cur. interest payments and div.

-foreign brokers who earn profis by matching orders

- commercial banks who borrow in var. curr. for their own needs and customers

- currency speculators

- central banks that conduct exchange interventions