Macroeconomics
C. How and Why the BOP is Balanced Ideally, a country's BOP should balance, meaning that money inflows and outflows should be equal. Achievingbalanceisadesirablegoalbecauseitindicatesthatthecountryisnotaccumulatingexcessive debts or surpluses in its international transactions. Any transaction that causes money to flow into a country is a credit on its BOP account, and any transactionthatcausesmoneytoflowoutisadebit.Thesumofallcreditentriesshouldmatchthesum of all debit entries so that the BOP is equal to: CA + CFA = 0 . This balanceistheoreticallyachievedbecausetransactionsrecordedontheCFAoffsetthoserecorded ontheCA.Inotherwords,iftheCAisindefcit,theCFAmustbeinsurplus,andiftheCAisinsurplus, the CFA must be in defcit. This creates the following mathematical identity: CA = −CFA . Forexample,ifacountryrunsaCAdefcitof$1billion,ithastohaveaCFAsurplusof$1billiontoachieve balance.
Now let’s combine the CA (table 1) and the CFA (table 2) to get a complete balance of payments:
Table 3: Hypothetical Example of a Country’s BOP in a Given Year
Billions of Dollars ($)
(1)
Export of goods
2,400
(2)
Import of goods
−1,700
(3)
Export of services
1,000
(4)
Import of services
−1,200
(5)
Balance of trade/Net exports = (1) − (2) + (3) − (4)
500
(6)
Income receipts from abroad
700
(7)
Income payments abroad
−600
(8)
Net income from abroad = (6) − (7)
100
(9)
Transfer incomes
400
(10)
Transfer payments
−800
(11)
Net unilateral transfers = (9) − (10)
−400
(12)
Balance on the CA = (5) + (8) + (11)
200
(13) Value of fnancial assets owned by foreigners in the country
500
214
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