Reading a BoP statement and the investment position

← Open Economy MacroReading a BoP statement and the investment position

Formulas for this chapter

Annualising quarterly data

Annual = Q1 + Q2 + Q3 + Q4 NEVER: Annual = any single quarter x 4

Whenever a question gives quarterly external data. If only one quarter is available, compare it with the same quarter of the previous year instead of scaling it.

Q1 to Q4: The four quarterly figures, added, not averaged and not extrapolated
Seasonality: The share of the year falling in one quarter; above 25 % means annualising that quarter overstates the year

Reserve import cover

Import cover (months) = reserves / (annual imports / 12)

Judging whether reserves are adequate to finance a deficit while an adjustment is arranged. Convert annual imports to a monthly figure first.

Reserves: Official reserve assets: gold, SDRs, the IMF reserve position and foreign currency holdings
Monthly imports: Annual imports divided by twelve, or the reported monthly bill

Net investment income from the investment position

Net income = (assets abroad x rate earned) - (foreign assets at home x rate paid)

Projecting next year's factor income line from this year's stock. Never apply a single rate to the net position; the two sides earn different rates.

Assets abroad: The nation's holdings of foreign assets, a stock at year end
Foreign assets at home: Foreign-owned holdings inside the nation, a stock at year end

Step 4 of 22

Quick checkTheory

A donor country cuts foreign aid by 10 billion dollars. By how much does its balance of payments improve, on the slide's reasoning?

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