Talk:Balance of payments

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Keynes and the Bancor[edit]

Would it not be wise for someone to include an extensive writeup of Keynes' Bancor? This seems particularly prudent as many superpowers like China have called for that system to be adopted. It looks like someone was attempting to get to this point by titling a section Bretton Woods II. Anyway, I'm not entirely competent to do so myself. This is a huge issue today, and expanding the discussion of this important concept and its history going back to 1945 would be a tremendous asset for wikipedia readers. — Preceding unsigned comment added by 71.126.175.99 (talk) 12:17, 28 June 2017 (UTC)[reply]

Suggestion[edit]

New video from Office for National Statistics in the UK on the UK's current account and how it fits into the UK's balance of payments - thought it might fit nicely on this page: http://www.youtube.com/watch?v=cbJIVmsKOZU&list=UUFAmuev5BtHEh3o-WxgFA3g

Statshan (talk) 10:50, 31 October 2014 (UTC)[reply]

merge[edit]

I removed this merger tag: merge|http://en.wikipedia.org/wiki/Balance-of-payments Why merge with pages that do not and should not exist?? --Michaël 12:44, 22 January 2006 (UTC)[reply]

get anymore the loans they need? I am a bit lost here... Anna13:00, 30 October 2008


comments[edit]

What happened to the United States balance of payments? Please explain yourself before removing text.--Jerryseinfeld 21:56, 29 Jan 2005 (UTC)

"The balance of payments is a measure of the payments that flow from one country to another." Are you sure? The balance of payments is generally understood to be the payments in and out of one particular country. The balance is between payments to all other countries and payments from all other countries. James James 04:32, 23 September 2005 (UTC)[reply]

Oil?[edit]

"Some consider the system today to be based on oil, a universally desirable commodity due to the dependence of so much infrastructural capital on oil supply. Since OPEC prices oil in US dollars, the US dollar remains a reserve currency, but is increasingly challenged by the euro, and to some degree the Japanese yen."

This is incorrect, I believe. I don't know of any responsible economists who say that the balance of payments today is "based on oil". Please cite sources?

And it is not true that the US dollar remains a reserve currency, "since OPEC prices oil in US dollars". The US dollar is a reserve currency primarily because it is a "refuge" from economic and political uncertainty elsewhere. The euro and the yen both have challenged that, but have proven themselves to be comparatively unstable recently, so forex "refuge" funds have remained in the dollar. Pricing oil or any other commodity in any other currency would not alter this, in fact would only reflect a change: oil is priced in dollars, still, precisely because the dollar is economically and politically stable. The reasoning is the reverse.

--Kessler 23:43, 27 September 2005 (UTC)[reply]

in fact, compared to the euro, the dollar is now quite unstable. —The preceding unsigned comment was added by khhllhklkl

.198.8.211 (talk) 13:53, 18 January 2007 (UTC).[reply]

No surpluses or deficits in a balance[edit]

"For a country to have a zero balance of payments, a current account deficit must be balanced by a capital account surplus."

This statement is wrong. Per definition, a balance cannot have a surplus or a deficit. In terms of the balance of payments the sum of current account and capital account equals the foreign reserves.

See also: Mishkin, Frederic S., 2004, The Economics of Money, Banking, and Financial Marktes 7th Edition, p.468: "Because the balance of payments must balance, the official reserve transactions balance, which equals the current account plus the capital account, tells us the net amount of international reserves that must move between governments (as represented by their central banks) to finance international transactions."

--Andreas Vester 10:42, 7 November 2005 (UTC)[reply]

Macroeconomic implications[edit]

could someone explain the importance of the BOP? What exactly is being paid for? imports alone? what about remittances? how does it effects the exchange rate?

am I just not understanding the economics?

If its not clear to me I figure there is something lacking in the article itself.

--P Funk 17:20, 3 February 2006 (UTC)[reply]

BoP=Zero[edit]

I just added some text about how it could not equal zero. I've always been taught that it had to but I also know the real world involves strangeness that models don't. Still, I emphasized that it equals zero in the theory and in general. I'm currently studying for my final exam in macro this May so as I learn more I'll smooth out the article.

By the way, what's the source on that map? --David Youngberg 18:58, 14 April 2006 (UTC)[reply]

People often find it difficult to understand why the BOP should equal zero, but that is until they remember Official Reserves. Official Reserves are the buffer which means you can borrow and not spend more, or you can lend and spend, its the reserve (or more simply - the country's savings account) that then funds the change. Official Reserves are in the BOP calculation and thats why it balances. --Occasional User
Thanks to recent edits, someone clarified that the map doesn't refer to the balance of payments, but the balance of trade, which makes more sense because now we aren't so worried about the bop not equaling zero and confusing the reader. However, shouldn't this map be at the bot article and not the bop? --David Youngberg 18:00, 21 April 2006 (UTC)[reply]
I was under the impression that the map showed those with current account deficits thus requiring borrowings from overseas. I suppose economics is all a knock-on effect so CAD = BoT. --Rchan89 14:17, 25 February 2007 (UTC)[reply]
I am sorry, but BOP is a double entry system. It must always equal zero. Sorry if you macro book tells you otherwise. --PBES (talk) 04:21, 25 November 2008 (UTC)[reply]

Could we have how governments could control their balance of payments?[edit]

Please MrDark 09:02, 29 April 2006 (UTC)[reply]

Ive done some of it
I think you're confusing balance of payments with balance of trade. It is possible, however, to have a deficit with balance of payments but there must be some kind of distortionary restriction. For example, from Macroeconomics 2nd ed (DeLong, Olney) "Thus under a gold standard, countries that run persistent balance of payments deficits--losing gold--must eventually raise interest rates to stay on the gold standard. However, surplus countries--those gaining gold--face no symmetrical crisis in which they must lower interest to stay on the gold standard....they can keep interest rates constant and watch their gold reserves grow." (p442)
Asymmetries (fixed exchanges rates, extensive capital restrictions, whatever) put pressure on the global economy, meaning governments must adjust because of the rules they put in place. If I recall correctly, in the modern era such asymmetries are rare and thus "correcting" the balance of payments is a misnomer. This needs to be made clear in the article. David Youngberg 02:29, 30 April 2006 (UTC)[reply]
I'll assume your right, because I don't understand. So you can make the required changes or just delete it :P MrDark 09:44, 1 May 2006 (UTC)[reply]

Skand swarup (talk) 04:28, 20 May 2008 (UTC) Governments could control their balance of payments (BoP) by altering the interest rate. Suppose there is a balance of payments deficit, the government can correct this by increasing the interest rate. Since the individual will now earn more money on the amount he saves, he will make an effort to save more. Thus, he will import lesser goods and services. On the other hand, firms in other countries would now want to invest in this country because the interest rate is high. So, money flowing out of the country goes down and money flowing in goes up. This will correct the BoP deficit.[reply]

US-specific Terminology[edit]

The first line in the Overview section mentions "our dollar". This appears to be U.S. specific. Would it be better to replace it with "a country's currency", "the currency of a particular country" or something similar? Feel free to make the change and then delete this section. Colin MacLaurin 11:02, 12 July 2006 (UTC)[reply]

Thanks to whoever fixed it. The language is much more neutral now. Colin MacLaurin 04:58, 20 July 2006 (UTC)[reply]

interpretations of Official Reserve Account- backwards?[edit]

I believe the following interpretation of changes in official reserves is backwards:

"In general, net increases in the Official Reserve Account will indicate that a country is buying its' currency to try to keep the price dear from the perspective of whatever resource is being sold to acquire the currency. Countries with net decreases in the Official Reserve Account are usually attempting to keep the price of their currency cheap relative to whatever resource they are purchasing in exchange for the currency."

If official reserves increase, that would indicate that a country is selling its own currency and buying another- not the other way around, as described in the article. This would result in reducing the value of the country's own currency (that it is selling).

In the opposite case, where official reserves decrease, the country is buying back its own currency with reserves, increasing the value of its own currency.

This interpretation makes sense, because countries with overvalued fixed exchange rates run into problems where they run out of official reserves in an attempt to keep their exchange rates at their overvalued level. Like in the case of Argentina in the late 1990s and countless other examples.

Somebody please correct me if I'm wrong, or edit the article! It's been too long since my international monetary system class for me to be absolutely certain. I'm only 85% certain.

I think you're right. The "reserves" are reserves of foreign currency, so if the reserves increase, as you said, domestic currency has been sold to purchase foreign exchange. If domestic currency is sold, the value decreases. Whew - I noticed that as being odd as well, and thought maybe I was going crazy. MrHumperdink 01:18, 6 November 2006 (UTC)[reply]
No, it was correct. Look at the Bank of Japan link. They have spent large amounts of yen to purchase Dollars and other assets. These were negative flows of Official Reserves. The official reserves of yen increase when there are more yen in the vaults. The official reserves of yen decrease when there are less. It's the financial account that works backwards. Take the case of a deserted island state. If they import foreign currency to purchase goods, there will be a capital surplus of the foreign currency and a trade deficit equal to the amount of currency imported. The intention of the central bank or its' government may not necessarily be towards manipulating its' currency's value, but the description of the flows was correct.

I'm sorry, I just realized how incomplete that last statement was. It depends on how the reserves are presented. If they are presented like the BEA does, they look normal: gold increases when it's put into the vault, foreign currency decreases when it leaves, etc. If it's presented like the BoJ, where the reserves are on the other side of the equation, then debits and credits are reversed. I'll try to find a good link and make editions. Worst case, I'll find the BEA or Fed and BoJ language to make a mock-up.

Hopefully, the changes I've provided will help. Please note them and correct any errors. Thanks.

Capital account surplus[edit]

I think it is misleading to describe the situation where liabilities rise faster than assets as a surplus. Wouldn't something "net capital inflows" be better? --Henrygb 12:22, 12 December 2006 (UTC)[reply]

Agree I concur, but it is technically correct. --Rchan89 14:17, 25 February 2007 (UTC)[reply]

Vandalism[edit]

Please keep aware of the possibility of future vandalism to the article. The Balance of Payments Identity section was removed and replaced with "ho cares", which was later removed. —Preceding unsigned comment added by 75.66.83.101 (talk) 19:08, 6 November 2007 (UTC)[reply]

Capital account - financial account mix up[edit]

After reading that I was less educated than before. If, by definition of the IMF, the capital account contains income from foreign investment and the financial account is basically made up by transfer of capital, then where is the foreign exchange balance???

The IMF definition: "The balance of payments is a statistical statement that summarizes transactions between residents and nonresidents
during a period."[1] The balance of payments comprises the current account, the capital account, and the financial account. "Together, these
accounts balance in the sense the sum of the entries is conceptually zero."[1]
Changes in the official reserves account for the differences between the capital account and current account, and effectively represent
foreign exchange interventions; the magnitude of these changes will depend on monetary policy

There ends do not meet! If the balance of payments is made up by the current, capital and financial account whose sum is zero, you can hardly add another balance to even out what is allready zero.. Or does the IMF add the "reserve account" (or foreign exchange balance) to its capital account? That could explain why they list the biggest importer of capital, China, as the biggest exporter(!!). http://www.imf.org/external/pubs/ft/gfsr/2007/01/pdf/statappx.pdf

-- I agree, I've just finished reading this article and I'm more confused than before as well. A clear line should be drawn between the IMF definition and the standard definition. —Preceding unsigned comment added by 91.67.221.151 (talk) 15:12, 26 May 2008 (UTC)[reply]

—Preceding unsigned comment added by 80.109.12.226 (talk) 08:58, 14 February 2008 (UTC)[reply]

The Reserve Account (various names as in Reserve Assets, Official Reserves or Foreign Reserves) forms part of (i.e. is a sub-account in) the Financial Account, and contains a list of the foreign reserves held. I agree this is not clear in the the article. The Current, Capital and Financial Accounts should balance - if not the error is contained in a fourth account called Net Errors and Omissions. Ted (talk) 09:59, 3 August 2008 (UTC)[reply]

Sorry, people but the IMF definition is the only valid definition. Macro books only try to explain the real world, but IMF is the real world. Each member country of the IMF (all countries in the world) need to follow the IMF definition. The currenct manual is the BOP5 manual, and all countries in the world signed up to it. So please stop using the macro boook as a reference - it is most likely not up to date. —Preceding unsigned comment added by PBES (talk • contribs) 04:27, 25 November 2008 (UTC)[reply]

Definition[edit]

Surely the opening sentence is incorrect. The Balance of Payments does not MEASURE anything. It is an account or list of transactions or summaries of transactions between one economy and all other economies. It is made up of a number of sub-accounts. It uses double entry, and both sides must sum to the same value - hence a balance. If they do not, a special account for errors and omisions is created so that they do balance.Ted (talk) 14:28, 31 July 2008 (UTC)[reply]

Hi Ted. Balance of Payment is a statistics? Would you agree? In statistics we usually, try to measure the real world. For instance inflation. And so in balance of payments we try to measure the cross-border transactions. The rest what you said is true, the b.o.p. is a double entry system, this does not however mean that we do not need to measure trade, reinvested earnings, foreing direct investment, loans, portfolio investment that make up the b.o.p. What happens if our measurements are wrong? We put the mistake in the errors and omisions account, as you correctly said. Cheers, --PBES (talk) 04:34, 25 November 2008 (UTC)[reply]

Structural disaster.[edit]

this page is terrible. and it's an important page.

the sub-sections of 'components' are not clearly delineated as sub-ordinate, and the logic is very unclear. while the explanations of each term seem to be OK and textbookish, the links only make partial sense.

example - in the body formatting does not make it clear that "official international reserves" is intended to be a sub-section of "Financial Account (IMF) / Capital Account (economics)". furthermore while "official international reserves" is reasonably defined, there is no indication of why we are talking about it. what is the arithmetic link? we have been told "The Balance of Payments for a country is the sum of the current account, the capital account, the financial account" and then get a detailed equation of financial account and capital account, but NO PLACE are we shown how/where/why we have been told about "official international reserves" and how that relates to the previous calculations.

I suspect this is typical wiki mediocrity-by-consensus-and-petty-bickering, but FYI, to a new reader of this page, it is a terrible read and despite some good parts, a fair bit makes no sense at all in context.

Yes I broadly agree with you here. If theres no objection, I'll probably rewrite the page in next few days, similar to how Ive expanded Capital account , except for this article I'll probably remove several potentially misleading sentences entirely. FeydHuxtable (talk) 12:27, 17 December 2009 (UTC)[reply]
Have had a first stab at a re-write. As BOP and correcting imbalances is likely to be a hot topic for 2010, it will be nice to get this article at least close to B class. I plan to make further improvements over the next couple of weeks. FeydHuxtable (talk) 18:31, 10 January 2010 (UTC)[reply]

Contradiction[edit]

Is it just me or does the third paragraph in the introduction directly contradict the second paragraph? The second paragraph states that the BOP must ALWAYS be equal to zero, then the third states that sometimes, it can be imbalanced. 219.89.240.49 (talk) 01:57, 30 January 2010 (UTC)[reply]

thanks, I've changed teh 3rd paragraph to try to clarify. Unfortuneatly this is not a topic that lends itself to a nice clear consistent treatment, as the term Balance of Payments is used in different ways even by the mainstream finnancial press. I hope its now as clear as can be while still supplying the reader with useful information about the various commong useages. FeydHuxtable (talk) 14:23, 1 February 2010 (UTC)[reply]

Incorrect Colours in this graphic[edit]

As you can see here the colours of the UK, France and Germany are obviously false.

None of this countries has an external debt of 13 Trillion Dollar.

Its also manipulative and simply wrong, to make Japan darker than Russia.

I suggest to fundamentally overwork this grapic, or simply abbandon it.

With best regards, —Preceding unsigned comment added by 88.65.33.183 (talk) 17:58, 13 January 2011 (UTC)[reply]

I liked that pic but I guess if you take it as being an accurate gauge rather than roughly indicative, then it is misleading. So I removed it for now. PS - no reason why you or others cant directly make a change to the article yourself, we only need to use the talk page if we disagree. Thanks for the feedback and best wishes. FeydHuxtable (talk) 19:48, 14 January 2011 (UTC)[reply]

Billion?[edit]

"Global reserves had peaked at about $7,500bn in mid 2008, then declined by about $500 as countries without their own reserve currency used them to shield themselves"

That cannot be right. 500 dollars wouldn't even be seen in the 7,500bn figure. Should it be billion perhaps? --Ehsanit 09:58, 23 May 2011 (UTC) —Preceding unsigned comment added by Ehsanit (talk • contribs)

Thanks for that, yes youre right it should have said billion. I've updated now slightly more precise figures are available. FeydHuxtable (talk) 12:01, 23 May 2011 (UTC)[reply]

My upcoming edits[edit]

I'm going to make several changes to the article:

  • The sub-section "Standard definition" says:
BOP = current account - capital account ± balancing item

where the capital account is defined to include the reserve account. By this definition of BOP, BOP is identically zero. So why use BOP on the left side instead of zero? (A similar equation occurs in the section "The IMF definition".)

  • The sub-section "Discrepancies in the use of term 'balance of payments'" says that a common misuse of the term BOP is:
A common source of confusion is to exclude the reserve account entry, which records the activity of the nation's central bank.

This is not a misuse -- it is absolutely standard terminology. See for example Bretton Woods system#U.S. balance of payments crisis, paragraph 3:

In 1960 Robert Triffin, Belgian American economist, noticed that holding dollars was more valuable than gold because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability.
  • The title of the article is "Balance of payments", but the lede (and the rest of the article) does not define this term. Instead, the lede begins with
A balance of payments (BOP) sheet is an accounting record....

This defines "balance of payments sheet (sic)", not "balance of payments". Obviously the reason for this failure of the lede to define the title term is what I mentioned above: according to the article, the balance of payments is the number zero, and no one wanted to write the lede as "The balance of payments is the number zero that appears in any balance of payments sheet."

Maybe this failure to use the standard definition for BOP is that, since the demise of the Bretton Woods system, many developed countries have floated or partially floated their exchange rates, giving them a zero or near zero balance of payments in the standard sense of the change in the reserve account. Perhaps younger editors don't remember the daily discussions of various countries' balance of payments deficits or surpluses, and corresponding discussions in textbooks. In any event, I'll correct the above problems. Duoduoduo (talk) 12:58, 26 June 2011 (UTC)[reply]

Thanks very much for your great edits. Im going to put back the "discrepeceny" section as the divergent ways in which the term is meant is still a common source of real world confusion. Crabbe is adamant that the correct use of the term includes everthing, which does make sense as that is the only way the BOP will be a genuine balance sheet. But as you suggest it is common to speak of BOP defecits where at least the reserve account is ommitted, so Ive changed the section so it no longer states which is correct.
I liked your improvements to the lede, though maybe it now says a bit too much about exchange rate systems? Im going to take out this sentence as it might be misleading for some readers: "Large balance of payments deficits can cause a country's central bank to run out of foreign currency, making it impossible for the fixed exchange rate to be maintained; such problems led to the demise of the fixed exchange rate Bretton Woods system in 1971." The Bretton Woods System broke down as the US was being drained of gold. The US did start running deficits but due to the special role of the dollar in that N-1 system, their foreign currency reserves werent a limiting factor (They wouldnt really be for other parties either as there was provision to borrow from the IMF. In the case of the US they did run down their fc , but only to buy back excess dollars to prevent them being converted to gold - not beacause they needed to defend their currency in the way the other members would have had to in a defecit situtation). Other than that, those improvements were much appreciated and its great to have a genuine expert and accomplished writer working on the article. FeydHuxtable (talk) 14:05, 27 June 2011 (UTC)[reply]
Hi, FeydHuxtable! I'm fine with you putting back in a more neutral version of the discrepancies discussion. I think, though, that it's not misleading to refer to a non-zero balance of payments just as it's not misleading to refer to a non-zero balance of trade. Crabbe prefers to interpret balance as an absolute (either something is balanced, or it isn't, implying that we can't refer to a non-zero balance of trade), while others may think of balance as a relative concept -- something can be more balanced or less balanced.
As for the sentence you're going to delete, I agree that the last part, about the demise of Bretton Woods, is misleading -- the US gold situation was the immediate cause of the demise; but the system was more and more in crisis during the 1960s as more and more countries experienced devaluation crises as they ran out of reserves. I think it would be better to retain the sentence and simply clarify that point; but in any event, I think the first half of the sentence should be left in, and it could be illustrated by reference to any of a large number of individual country balance of payments crises. Duoduoduo (talk) 14:30, 27 June 2011 (UTC)[reply]
Im going to have to disagree there. Country level BOP crises don't on their own put the whole International Monetary System into crisis – and certainly didnt in the 1960s. Overall the frequency of BOP crises in the Bretton Woods period was less than half that of the neoliberal era that followed. I don't have the detailed figures in front of me but i seem to recall there were far fewer crises in the 1960s than the 80s. Regardless, its not just the frequency of BOP crises but how consequential they are – which depends in part on the current configuration of the IMS. In the BW era BOP crisis were on the whole mitigated much better than before or since, partly due to the relative ease of getting assistance from the IMF. Hence the unparalled global macro economic performance of the period, especially in the 60s (68 & 69 being to some extent outliers). Here's a reasonable historical overview from the monetarist Michael D bordo. You get a similar picture from Reinhart , Rogoff , Eienengreen etc. Even if one excludes those with Keynesian symphathies, Id say mainstream opinion is almost unanimous in blaming the collapse on US related factors, like gold coverage and Tiffin dilemma.
Also I took out the bit saying that flows are balanced by the exchange rate adjusting to equate the net flow of funds. What you wrote was perfectly correct in a sense, but it might imply that the exchange rate plays a more active rebalancing role than is the case? Sorry if this seems over critical and thanks once again for your contribution. Ive felt quite alone these past few years on global macro articles so it would be great to have more expert input. FeydHuxtable (talk) 15:41, 27 June 2011 (UTC)[reply]
Interesting. I personally think the fact that there were more crises in the 1980s that the 1960s is irrelevant to the question of whether they put a strain on the world-wide fixed exchange rate system of Bretton Woods. My memory is that, with major economies undergoing devaluation crises, finance ministers everywhere seemed to be constantly in a panic; but it was a long time ago, so my memory could be wrong. But anyway, the effect of devaluation crises on Bretton Woods was not my point -- it was just an example, and maybe not a very good one. The point was simply that persistent balance of payments deficits can cause a central bank to run out of reserves and have to abandon the fixed rate. But you may be right that it doesn't belong in the lede; I'll just add currency crisis to the see-also section.
I'm not sure why you deleted the word "surplus" from the equations. This absence led to confusion before I did my edit: it said current account minus capital account = BOP [=0]. This could only have meant current account surplus minus capital account deficit = 0, which is a strange way to express it, and in any event the meaning was obscured by the absence of the words surplus or deficit. In the present form I think the meaning is still obscured by omitting "surplus". Comments? Duoduoduo (talk) 16:18, 27 June 2011 (UTC)[reply]
Thanks again, I agree with what youre saying about BOP crises and also that its not a central issue for this article.
Before I rewrote the article back in 2010 I consulted 9 or 10 text books which seemed to express the BOP identity similar to the version prior to your changes. I've put back the word in the 2nd equation, with a little extra redundancy for clarity. On reflection your change seems useful as it will help folk to understand a very common usage. But perhaps haveing the word 'surplus' in all the equations risks some people misunderstanding in the sense of thinking of BOP as a balance and therefore they might think a +ve current account is balanced out by a +ve capital account? (Often a current acct surplus is viewed as healthy for a nation but a capial acct surplus unhealthy unless its driven by FDI rather than borrowing) Its remarkable how many serious people dont understand the BOP and the basic useage of terms like Current account and Capital account, even though theyre such fundamental concepts. So I think its worth us going for clarity rather than the precision of expression we might prefer if we were writing just for mathematically trained economists. Perhaps we've struck the right balance now? FeydHuxtable (talk) 13:58, 28 June 2011 (UTC)[reply]
Looks good now! Duoduoduo (talk) 15:09, 28 June 2011 (UTC)[reply]

Sum to zero?[edit]

When all components of the BOP accounts are included they must sum to zero

Suppose I sit in Germany, put a €100 note in an envelope and send it as a gift to my friend in France. Presumably this would subtract €100 from the transfer section of Germany's current account. Which other BOP account would be affected to ensure that the BOP accounts sum to zero? Is there some sort of "goodwill" section in the capital account? Thanks, AxelBoldt (talk) 00:26, 14 September 2011 (UTC)[reply]

In a sense nothing would happen to the BOP sheet -your gift is an example of a "dark transaction" , officials would have no way of knowing about it so wouldnt make any corresponding entires.
Probably the most useful way of looking at it is like this. Imagine Germany had a current account deficit – due to yourself giving away €100, Germany would have to either borrow an extra 100 Euros or sell an extra 100 Euros worth of assets to sustain the spending for its foreign purchases.
The specific €100 donation wouldn't have a direct counterpart on the Capital Account. It wouldn't even appear directly on the current account – even if it wasn't a dark transaction, it would be aggregated with other transfer payments.
The Capital account does have a section for transfer payments, but doesn't include direct cash gifts; its mainly for debt forgiveness and transfers that involve the handing over of ownership of financial assets. Every entry in the current account gives rise to an entry in the capital account – but this happens after the sums have been aggregated, and there is no direct correspondence in terms of the type of transfer or payment on the two accounts. FeydHuxtable (talk) 17:04, 16 September 2011 (UTC)[reply]
Ok, the cash gift example was a bit frivolous, but let's consider the aggregated transfer payments that Greek guest workers in Germany send home to Greece every year. That's a considerable chunk of money, presumably not "dark", so I assume it will be recorded in the current account. But how or why must a corresponding sum appear in Germany's capital account? I guess I don't understand why the sum of all accounts must necessarily equal zero. Couldn't a country just bleed away money? AxelBoldt (talk) 19:51, 17 September 2011 (UTC)[reply]
A common difficulty in talking about BOP is that the term is used in so many different ways. In the article we've defined BOP mainly in the accountancy sense which is what most of the explanatory sources do. When officials draw up a BOP sheet they follow the rules of Double entry accounting and so it must sum to zero.
Looks like youre thinking of BOP in a slightly more tangible sense: to refer to a nation's full set of international monetary transactions. And youre right – in the tangible sense, at least with small amounts and/or over a short timescale, and especially when a nation is a member of a currency union , it is possible to bleed money.
But even in the tangible sense BOP wont be too far off from suming to zero - if a nation's outgoings exceed its earnings, then it has to run down its assets or borrow a roughly equivelent ammount (and vice versa). Id be surprised if "BOP bleeding" is commonly one of the major factors affecting changes in the size of a nation's Money supply. (There may be exceptions such as when a nation is excessively printing money). Anyway we're well into OR territory now as none of the existing sources discuss these complexities. But hopefully this has answered your question? FeydHuxtable (talk) 16:31, 19 September 2011 (UTC)[reply]
Not quite, but we're getting there :-) When the German official sits down to draw up the neat zero-sum double-accounting BOP sheet and his statistician tells him that this year Greeks transferred 10 billion Euros from Germany to Greece, then what does he do with that number? Which two positions of the BOP are affected? (That's why I postulated a "goodwill" position in the capital account earlier, because that was the only thing I could think of.) AxelBoldt (talk) 16:34, 20 September 2011 (UTC)[reply]

That is a good but deceptively tricky question. Up to now Ive been hiding most of the real world complexity both in my answers and in the article (as do all the sources). But now if I give you a simple and short answer it may seem confusing. So if youre really interested in this, pull up a chair.

You'd need to ask a German civil servant for a definitive answer. Most states actually draw up several different sheets for various audiences – the sheets differ not only in presentation and degree of aggregation, but in accountancy conventions and even in semantics (the meaning of the term capital account etc). Except for the sheets that are submitted to multilateral institutions like IMF, the formats used for BOP sheets can vary substantially from state to state. Anyway, here is a simplified presentation of a double entry BOP sheet.

Transaction Current account Capital account Balancing item
Net Exports €200Bn -€199Bn -€1Bn
Net Bond purchases -€189Bn €188Bn €1Bn
Net outbound remittances -€10Bn €10Bn 0
Net inbound FDI €5Bn -€6Bn €1Bn

So theres your €10Bn transfer appearing in both accounts. Notice how the figure is exactly the same in both - with a transfer officials might actually write down the entry in both accounts at the same time in true double entry style. For other transactions the entries can be driven by separate reporting processes that dont always match and hence the need for a balancing column (aka errors and ommissions). You might well be thinking the table above isnt consistent with the standard definition of the two accounts e.g. exports should appear just in the current account. Well that is the case for the refined BOP sheets that are given to ministers and the financial press. Here's the same data presented in a more standard way.

Current account Capital account Balancing item
Net Exports €200Bn
Net outbound remittances -€10Bn
Net Bond purchases -€188Bn
Net inbound FDI €6Bn
Sums to €190Bn Sums to -€182Bn €8Bn

Note how in the more standard (but not formally double entry) presentation, the concept of the two accounts balancing still applies but in a somewhat looser sense. You might think this is all a bit unsatisfactory, but it's a reflection of the difficulty inherent in global macro when you try to look behind the convienient abstractions. John Hicks, one of the most influential writers on the relationship between econ and accounting has talked about the its hideous complexity, and talking about incomes and savings (loosely current account and capital account) said when applied to dynamic enconomic analyses they are "bad tools which break in our hands". Its not uncommon for writers to say something like "an entry in the current account must give rise to an entry in the capital account" when talking in a tangible context such as talking about global imbalances - this is technically not correct but still a useful shorthand way of refering to an important but somewhat ineffable truth.

Ive added a footnote to the article to reflect some of what weve discussed, but I don't think it would be advisable to try to capture most of this complexity in the article. We already take a more rounded and comprehensive view than any one source and if anything I tend to the view that the article might benefit from being simplified. FeydHuxtable (talk) 12:26, 21 September 2011 (UTC)[reply]

Thanks a lot for explaining it in so much detail and being so patient with me! I didn't know what wormy can of worm I was opening :-) When I read the article and it just stated that the sum must be zero, I didn't quite get it and I thought I might be missing something obvious. Obvious it is not! Cheers, AxelBoldt (talk) 18:49, 27 September 2011 (UTC)[reply]

Dr. Rios-Rull's comment on this article[edit]

Dr. Rios-Rull has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:


I would not use supply and demand in the first paragraph


We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Rios-Rull has published scholarly research which seems to be relevant to this Wikipedia article:

  • Reference : Mendoza, Enrique G & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers 6149, C.E.P.R. Discussion Papers.

ExpertIdeasBot (talk) 15:48, 19 May 2016 (UTC)[reply]

Dr. Thorbecke's comment on this article[edit]

Dr. Thorbecke has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

Very thorough discussion

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Thorbecke has expertise on the topic of this article, since he has published relevant scholarly research:

  • Reference : Thorbecke, Willem, 2011. "The Effect of Exchange Rate Changes on Trade in East Asia," ADBI Working Papers 263, Asian Development Bank Institute.

ExpertIdeasBot (talk) 15:17, 11 July 2016 (UTC)[reply]

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