International Business Chapter 7

The BOP Accounting system is a double-entry bookkeeping system designed to measure and record all economic transactions between residents of one country and residents of all other countries during a particular time period.
BOP records international transactions and supplies vital information about the health of a national economy and likely changes in its fiscal and monetary policies.
BOP statistics can be used to detect signs of trouble that could eventually lead to governmental trade restrictions, higher interest rates, accelerated inflation, reduced aggregate demand, or general changes in the cost of doing business in any given country.

The BOP accounting system can be divided conceptually into four major accounts. The first two accounts—the current account and the capital account—record purchases of goods, services, and assets by the private and public sectors. The official reserves account reflects the impact of central bank intervention in the foreign-exchange market. The last account—errors and omissions—captures mistakes made in recording BOP transactions.

The goods account records sales and purchases of goods.
The difference between a country’s exports and imports of goods is called the balance on merchandise trade. The services account records sales and purchases of such services as transportation, tourism, medical care, telecommunications, advertising, financial services, and education.
The difference between a country’s exports of services and its imports of services is called the balance on services trade.
The third type of transaction recorded in the current account is investment income.
The fourth type of transaction in the current account is unilateral transfers, or gifts between residents of one country and another. Unilateral transfers include private and public gifts.

Records capital transactions—purchases and sales of assets—between residents of one country and those of other countries; can be divided into two categories: foreign direct investment (FDI) and portfolio investment.
Capital inflows are credits in the BOP accounting system. They can occur in two ways: 1. Foreign ownership of assets in a country increases. 2. Ownership of foreign assets by a country’s residents declines.
Capital outflows are debits in the BOP accounting system. They also can occur in two ways: 1. Ownership of foreign assets by a country’s residents increases. 2. Foreign ownership of assets in a country declines.

FDI is any investment made for the purpose of controlling the organization in which the investment is made, typically through ownership of significant blocks of common stock with voting privileges. Under U.S. BOP accounting standards control is defined as ownership of at least 10 percent of a company’s voting stock.

A portfolio investment is any investment made for purposes other than control. Portfolio investments are divided into two subcategories: short-term investments and long-term investments. -Short-term portfolio investments are financial instruments with maturities of one year or less. Included in this category are commercial paper; checking accounts, time deposits, and certificates of deposit held by residents of a country in foreign banks or by foreigners in domestic banks; trade receivables and deposits from international commercial customers; and banks’ short-term international lending activities, such as commercial loans. -Long-term portfolio investments are stocks, bonds, and other financial instruments issued by private and public organizations that have maturities greater than one year and that are held for purposes other than control.

• The official reserves account reflects the impact of central bank intervention in the foreign exchange market
• 
  
• Official reserves account – records level of official reserves held by a national government
• 
  
• Official reserves comprise four types of assets: 1) Gold, 2) Convertible currencies 3) SDRs, 4) Reserve positions at the IMF
• 
  
• Current Account + Capital Account + Official Reserves Account = 0

• Errors and omissions captures mistakes made in recording BOP transactions
• 
  
• The errors and omissions account is used to make the BOP balance in accordance with the following equation: Current Account + Capital Account + Official Reserves Account + Errors and Omissions = 0
• 
  
• Flight capital – money sent abroad by foreign residents seeking a safe haven for assets.