This is MoneyClub

Adapted from International Financial Markets, Amir Yaron of the Wharton School (Finance 219/719)
Part 1. Foundations of Int’l Financial Management

Chapter 2 Outline
-Balance of Payments Accounting
-Balance of Payments Accounts
—-The Current Account
—-The Capital Account
—-Statistical Discrepancy
—-Official Reserve Account
-The Balance of Payments Identity
-Balance of Payments Trends in Major Countries
-Summary

Chapter 2 Takeaways

-Balance of Payments (BOP) Accounting
Defined as a statistical record of a country’s transactions with the rest of the world over a certain period of time in the form of double-entry bookkeeping. It provides information about 1) demand and supply of its currency. 2) its potential as a business partner for the rest of the world – a surplus increases chances that it would accept imports. 3) the performance of the country in international competitivity – trade deficits => domestic industry lacks competitiveness.
-Balance of Payments Accounts
International trade as well as cross-border investments are recorded in the BOP.
—-The Current Account
Export and import of goods and services. Subdivided into 1) Merchandise trade (trade balance), 2) Services (invisible trade), 3) Factor Income (eg interest, dividends, other invome on investments), 4) Unilateral transfers (“unrequited payments”) e.g. foreign aid, reparations, grants, gifts. treated as goodwill in accounts . Since a deficit must be financed by borrowing from foreigners or drawing down on wealth, a deficit represents a reduction in net foreign wealth. J-curve effect: the initial deterioration and the eventual improvment of the trade balance following a depreciation, evidenced by a 1967 British devaluation. Research shows this occurs 40% of the time, and theory shows this happens only if imports and exports are inelastic (short run).
—-The Capital Account
Purchases and sales of assets like securities, real estate, businesses. Can be divided into 1) direct investment e.g. FDI – acquisitions, building factories 2) portfolio investment e.g. assets that do not involve a transfer of control, 3) other investment e.g. transactions in currency, bank deposits, trade credits, etc. 
—-Statistical Discrepancy
Differences arising from difference in methods used to record transactions.

The cumulative BOP including the current account, capital account, and statistical discrepancies = overall balance/official settlement balance. This indicates the gap that must be accommodated with the govt’s official reserves.
—-Official Reserve Account
All purchases and sales of international reserve assets such as gold, dollars, forex, and SDRs. To support gold, sell assets and “buy” dollars. World reserves – 63.8% is USD, 19.7% is Euro (2003 figures) 2% gold.
-The Balance of Payments Identity (BOPI)
BCA + BKA + BRA = 0 (C = current, K = capital, R = reserves)
With pure flexible exchange rate regime, no reserves are needed so BCA = -BKA is possible.
Identity not Causation: it is equally possible to argue that current account deficits lead to capital account surpluses as the other way around.
-Balance of Payments Trends in Major Countries
US has current deficits (up to $531b), capital surpluses. Largest debtor nation.
Japan has current surpluses, capital deficits. Lagest creditor nation.
UK current deficits, capital surpluses.
Germany current surpluses, capital deficits. Brief period of current deficits in 1991-2001 due to reunification.
China current surplus, capital surplus. Official reserves up to $610b in 2004.
-Summary
A country need not achieve BOP equilibrium every year. If a trade deficit is due to import demand for capital goods for economic development projects, the deficit can be self correcting in the long run because supply expansion can increase exports/decrease imports. However if the deficit is due to importing consumption goods, the situation will not correct by itself.