why BOP = 0 always? (1 Viewer)

[Turner]

Originally posted by Lainee
But why do Payments for imports (M), Income/transfer debits (Y debits)and Capital and financial outflow (K outflow) make up the supply of $A? And the others the Demand for $A?

That's simple. When someone imports, they pay money overseas, hence supplying the $A.

I thought (maybe I'm wrong) that under a floating $A the supply == demand because technically there is market equilibrium. Under a fixed $A there is either more supply or demand because of the fixed price. Is that over simplifying it? Is there something I've missed?

 

[Newbie]

well in a sense

the value of $A will represent this equilibrium but demand and supply are dynamic bitches hence the changes in the value of the dollar throughout the day the hour the minute

but floating the dollar will not just create an equilibrium

 

[AGB]

Originally posted by Turner
I thought (maybe I'm wrong) that under a floating $A the supply == demand because technically there is market equilibrium. Under a fixed $A there is either more supply or demand because of the fixed price. Is that over simplifying it? Is there something I've missed?

thats all the understanding you would need for hsc economics....forget newbie's 'dynamic bitches'

 

[Turner]

Originally posted by Newbie
but floating the dollar will not just create an equilibrium

well... the market is always trying to achieve equilibrium, although it technically will never occour it is a lot closer than under a fixed dollar system.

But I'll be sure to put 'dynamic bitches' in my exam.

 

[AGB]

equilibrium is just the point at which demand = supply.....i think u might be getting confused with the true value of the dollar

 

[Turner]

Yes well of course I know equilibrium is when demand == supply, duh

 

[Aj10001]

Originally posted by AGB
Here is the theory on why the BOP always = 0

Supply of $A
Payments for imports (M)
Income/transfer debits (Y debits)
Capital and financial outflow (K outflow)

Demand for $A
Receipts for exports (X)
Income/transfer credits (Y credits)
Capital and financial inflow (K inflow)

Supply of $A = Demand for $A
M + Y debits + K outflow = X + Y debits + K inflow
M X + Y debits Y credits = K inflow K outflow (rearranged equation)
Balance on Current account = Balance on Capital and Financial account

Im fairly certain the equation BOP = 0 has absolutely nothing to do with the exchange rate.

The BOP = 0 because we know that:

BOP = Surplus on Capital and financial Account + Deficit on Current Account (straight from Dixon's textbook)

Surplus on Capital and Financial Account = Deficit on Current Account (straight from textbook)(This means that the trade deficit is payed for by increased borrowings)

Therefore, BOP = 0

This has nothing to do with the exchange rate. That is just confusing things

 

[Aj10001]

Originally posted by Turner
AGB, in countries where there is a surplus in the current account, that country purchases debt and equity with the extra from the current account surplus (and trade surplus). Btw I think Aj10001 is confusing trade balance with the Current Account Balance, which are two separate things.

I simply talk about the trade balance to simplify things because it is the major component of the current account

 

[Aj10001]

Originally posted by AGB
your theory is quashed when there is a trade surplus...

No its not.

When there is a trade surplus it is countered by increased lending on the capital and financial account rather than borrowing.
The equation still works.

 

[Newbie]

hi

the offsetting equality of the 2 components of BOP exists under a floating exchange rate

 

[rukawasan]

Originally posted by Aj10001
Im fairly certain the equation BOP = 0 has absolutely nothing to do with the exchange rate.

The BOP = 0 because we know that:

BOP = Surplus on Capital and financial Account + Deficit on Current Account (straight from Dixon's textbook)

Surplus on Capital and Financial Account = Deficit on Current Account (straight from textbook)(This means that the trade deficit is payed for by increased borrowings)

Therefore, BOP = 0

This has nothing to do with the exchange rate. That is just confusing things

dude... its all about the exchange rate... bop=0 because of our floating exchange rate...

 

[AGB]

Originally posted by Aj10001
Im fairly certain the equation BOP = 0 has absolutely nothing to do with the exchange rate.

The BOP = 0 because we know that:

BOP = Surplus on Capital and financial Account + Deficit on Current Account (straight from Dixon's textbook)

Surplus on Capital and Financial Account = Deficit on Current Account (straight from textbook)(This means that the trade deficit is payed for by increased borrowings)

Therefore, BOP = 0

This has nothing to do with the exchange rate. That is just confusing things

that definition is way to simple, and pretty much wrong.... trust me, if you look at that post i made, and try and follow it, you will see that yours is not correct...

Originally posted by Aj10001
No its not.

When there is a trade surplus it is countered by increased lending on the capital and financial account rather than borrowing.
The equation still works.

just because a country has a surplus net flow on the CA in one year does not necessarily mean they will be lending money. if, for example, that country had a persistent CA deficit, thus a surplus on the KAFA, however in one year that situation changes, then that country is definitely not going to start lending just because all of a sudden they have a CA in surplus.... your logic doesn't work....

 

[AGB]

Originally posted by Aj10001
I simply talk about the trade balance to simplify things because it is the major component of the current account

thats not actually true either......the major component of the current account is the net income component

 

[Turner]

Originally posted by AGB
thats not actually true either......the major component of the current account is the net income component

I think he means that a lot more money flows in and out of the economy because of trade rather than income. But the income component does make up the majority of the current account defecit.

This has nothing to do with the exchange rate. That is just confusing things

I assumed it does. My textbook says the BOP == 0 under a floating exchange rate, wouldn't that mean it doesn't sum to 0 always under a fixed rate?

 

[olay]

errm. shet. O_O

 

[schmackers]

Ok, I'm slightly confused after reading this thread. My teacher said something about how they add in a thing called the "balancing item" in order to make CAD=KAS (therefore BoP equalling zero)? It's some kind of accounting thing. Does anyone know what this is and how/if it fits into the floating exchange rate theory?

 

[laracroft]

OMG WAT R U TALKING BOUT?

ok, seriosuly u pl have confused me sooo much i have absolutely no idea any more what the BoP is!
im confused with the whole thingabout the realtion of the BoP to the excahnge rate, coz some ppl are like yes it has to do with the floating excahnge rate n others are like No it doestn, so can some1 whoo actually knows what their talking bout, like tha dude doing economics at UNI please give me a clear expalnation of the BoP, or im gonna fail this section of the HSC!

 

[Turner]

Originally posted by schmackers
Ok, I'm slightly confused after reading this thread. My teacher said something about how they add in a thing called the "balancing item" in order to make CAD=KAS (therefore BoP equalling zero)? It's some kind of accounting thing. Does anyone know what this is and how/if it fits into the floating exchange rate theory?

The accounting thing is probably the doubly entry system. I've been told that you have to know that the BOP always equals zero under a floating exchange rate, it's nice if you know why but you don't need to know why.

ok, seriosuly u pl have confused me sooo much i have absolutely no idea any more what the BoP is!
im confused with the whole thingabout the realtion of the BoP to the excahnge rate, coz some ppl are like yes it has to do with the floating excahnge rate n others are like No it doestn, so can some1 whoo actually knows what their talking bout, like tha dude doing economics at UNI please give me a clear expalnation of the BoP, or im gonna fail this section of the HSC!

BOP == 0 under a floating exchange rate. That is, the current account defecit equals the capital and financial account surplus. For high school Eco, that's all you need to know.

 

[AGB]

here is the definitive answer to why the BOP = 0 under a floating exchange rate system


Supply of $A
Payments for imports (M)
Income/transfer debits (Y debits)
Capital and financial outflow (K outflow)

Demand for $A
Receipts for exports (X)
Income/transfer credits (Y credits)
Capital and financial inflow (K inflow)

Supply of $A = Demand for $A
M + Y debits + K outflow = X + Y debits + K inflow
M X + Y debits Y credits = K inflow K outflow (rearranged equation)
Balance on Current account = Balance on Capital and Financial account

 

[Grey Council]

AGB is correct. Disregard everything else, except, perhaps, shanonm's post (the second on this page) which MIGHT be of interest, maybe not practical use.

And AGB's info can be found word for word in the Bulmer textbook. hehe