Page 132 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes The International Liquidity Account in this case represents the BOP surplus magnitude and
only shows how the BOP surplus is entered or accounted for in the balance sheet. A debit entry
in the International Liquidity Account shows that there is a surplus in the BOP of the country
for that year.
(B) The following table has the exact opposite picture. The sum of debit payments ($3,500 million)
exceeds the sum of credit receipts ($3,350 million) by $150 million which represents the net
deficit in the BOP due to the first five accounts in the table.
Table 2 : Deficit Case ($ Million)
Credit Debit
(Receipts) (Payments)

1. Goods Account 800 1,500
2. Service Account 1,400 500
3. Unilateral Transfer Account 120 100
4. Long Term Capital Account 400 900
5. Errors & Omissions
(including short term capital) Account 630 500
6. International Liquidity Account 150

7. Balance of Payments 3,500 3,500
The question to ask here is, how was this deficit of $150 million financed ? The answer is that it
was financed in one of the following three ways :
(a) selling or exporting gold worth $150 million; or
(b) drawing down upon the past accumulated foreign reserves equal to the sum of $150 million;
or
(c) borrowing capital in the sum of $150 million on short term or long term basis from friendly
countries or international institutions, like the International Monetary Fund.
The International Liquidity Account in this case, then, represents the BOP deficit sum of $150
million. This amount is entered as credit item to indicate how the sum of $150 million was
brought in to finance the deficit of that magnitude arising out of the first five accounts in the
BOP schedule. A credit entry in the International Liquidity Account shows, therefore, that the
country had a deficit in its BOP of that magnitude in that particular year.
Having understood the six major BOP accounts, it is possible now to study the important concepts
and distinctions that one comes across in BOP discussions. Before we do that, let us take a look at
the following sample of BOP schedule using some hypothetical numbers in each of the six accounts.
Table 3 : Balance of Payments Schedule—A Sample
Major Accounts Credit Debit Net Surplus (+) or
(Receipts) (Payments) Deficit (–)

1. Goods Account 200 180 + 20
2. Services Account 100 250 – 150
A. BALANCE OF TRADE (1 + 2) (300) (430) (– 130)
3. Unilateral Transfers Account 300 120 + 180
B. BALANCE OF PAYMENTS ON
CURRENT ACCOUNT (1 + 2 + 3) (600) (550) (+ 50)

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