Using a person's budget to understand the balance of payments...

Using a person's budget to understand the balance of payments

Сообщение 2023-03-09 18:06:55

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To get a better understanding of the balance of payments accounts, let’s think of a single person’s sources of funds and uses of funds. We can summarize Harry’s budget for this month as shown in the table below:

Source of funds or use of funds	Amount
Income earned from selling copies of his book “Talking to snakes for fun and profit”	+dollar sign, 1000
Income earned from owl consultancy services	+dollar sign, 200
Money spent on dementor repellant	minus, dollar sign, 1200
Money spent paying for investment advice	minus, dollar sign, 300
Payment from Ron to borrow Harry’s wand	plus, dollar sign, 50
Allowance from Aunt Petunia	plus, dollar sign, 2
Harry’s balance	minus, dollar sign, 248

Uh oh! Harry ran a little short this month!

Suppose there was one more thing that Harry hasn’t included yet: he also loaned Lucius dollar sign, 70. That means he also has a financial asset in the form of an I.O.U. from Lucius, but also dollar sign, 70 less money available to him. That means Harry has a total shortfall of cash of dollar sign, 248, plus, dollar sign, 70, equals, dollar sign, 318. As usual, his friend Hermione bails him out of trouble by loaning him dollar sign, 318.

Harry’s loan to Lucius and his loan from Hermione are different from the transactions in his budget because the dollar sign, 318 loan and the dollar sign, 70 loan both created liabilities for someone. So, let’s keep track of the transactions that created a liability in a separate balance sheet:

Source of funds or use of funds	Amount
Loan to Lucius	minus, dollar sign, 70 (it is negative because this money left his possession)
Loan from Hermione	plus, dollar sign, 318 (it is positive because this money came into his possession)

Harry’s budget is his current account that summarizes all transactions that have not created liabilities. The transactions that created liabilities are his capital and financial account because those I.O.U. ’s eventually will need to be repaid.

We can summarize these in the table below:

Source of funds or use of funds	Amount
Income earned from selling copies of his book “Talking to snakes for fun and profit”	start color #6495ed, plus, dollar sign, 1000, end color #6495ed
Income earned from owl consultancy services	start color #6495ed, plus, dollar sign, 200, end color #6495ed
Money spent on dementor repellant	start color #6495ed, minus, dollar sign, 1200, end color #6495ed
Money spent paying for investment advice	start color #6495ed, minus, dollar sign, 300, end color #6495ed
Wand rent	start color #6495ed, plus, dollar sign, 50, end color #6495ed
Allowance from Aunt Petunia:	start color #6495ed, plus, dollar sign, 2, end color #6495ed
Harry’s current account balance	$1000+$200+$50+$2−$1200−$300=−$248
Outflow of money loaned	start color #ffa500, minus, dollar sign, 70, end color #ffa500
Inflow of money borrowed from Hermione	start color #ffa500, dollar sign, 318, end color #ffa500
Harry’s Capital and Financial Account balance	start color #ffa500, dollar sign, minus, 70, plus, dollar sign, plus, 318, equals, dollar sign, plus, 248, end color #ffa500

We can relate a country’s balance of payments account to the scenario we described above. The table below shows entries for the nation of Panem that are comparable to each of the entries on Harry’s Balance sheet:

Harry's source of funds or use of funds	Harry's Amount	Panem's amount (in billions)	Panem's category of BOP
Income earned from selling copies of his book “Talking to snakes for fun and profit”	start color #ffa500, plus, dollar sign, 1000, end color #ffa500	start color #df0030, plus, dollar sign, 1000, end color #df0030	Goods exports
Money spent on dementor repellant	start color #ffa500, minus, dollar sign, 1200, end color #ffa500	start color #df0030, minus, dollar sign, 1200, end color #df0030	Goods imports
Balance on goods	$$1000 - $1200 = -$200$	$$1000 - $1200 = -$200$	Balance on goods
Money spent paying for investment advice	start color #ffa500, minus, dollar sign, 300, end color #ffa500	start color #df0030, minus, dollar sign, 300, end color #df0030	Service imports
Income earned from owl consultancy services	start color #ffa500, plus, dollar sign, 200, end color #ffa500	start color #df0030, plus, dollar sign, 200, end color #df0030	Service exports
Balance on services	$- $300 + $200 = -$100$	$- $300 + $200 = -$100$	Balance on services
Wand rent	start color #ffa500, plus, dollar sign, 50, end color #ffa500	start color #df0030, plus, dollar sign, 50, end color #df0030	Net investment income (also called factor income)
Allowance from Aunt Petunia	start color #ffa500, plus, dollar sign, 2, end color #ffa500	start color #df0030, plus, dollar sign, 2, end color #df0030	Transfers and remittances
Harry’s current account balance	$(-+ (-++ = (- $200) $100) $50$2$248)$	$(-+ (-++ = (- $200) $100) $50$2$248)$	Panem’s current account balance
Outflow of money loaned	start color #6495ed, minus, dollar sign, 70, end color #6495ed	start color #9d38bd, minus, dollar sign, 70, end color #9d38bd	Outflow of foreign assets from Panem
Inflow of money borrowed from Hermione	start color #6495ed, dollar sign, 318, end color #6495ed	start color #9d38bd, plus, dollar sign, 318, end color #9d38bd	Inflow of foreign assets to Panem
Harry's capital and financial account balance	$-+ = $70$318$248$	$-+ = $70$318$248$	Panem’s capital and financial account balance
Balance of payments	$C A + C F A = -$248 + $248 = $0$	$C A + C F A = - $ 248 + $ 248 = $0$	Balance of payments