Balance of Payments

Purpose and Perspective

The Balance of Payments sector represents a set of accounting relationships tracking the major cross -border financial flows between the country and the rest of the world. The sector also calculates the level of export as a function of the country’s productivity and the level of taxes on international trade. Given exports, imports are calculated as residual of the GDP identity. The Balance of Payments sector is primarily based on the IMF Balance of Payments manual.

Model Structure and Major Assumptions

• Level of productivity affects amount of export as share of GDP [1]

• Taxes on international trade affect the amount of export as share of GDP [2]

• Only major items of the categories of flows form the IMF balance of payments manual are considered [3]

Exogenous Input Variables

• Private Capital And Financial Account As Share Of Gdp Units: Dmnl

Initialization Variables

• Initial total export share of GDP - Units: Dmnl

Modeling Details

Although the sector covers all major categories of the balance of payments, it does not include all items of cross-border financial flows, but only the major flows that are relevant to the other sectors of the model. For instance, in the public capital financial account we only account for foreign financing, a key flow in the finance sector. Similarly, among public current transfers we only consider grants.

Footnotes and References

[1] Wagner, J., (2007). Exports and productivity: A survey of the evidence from firm-level data. The World Economy, 30(1): 60–82.

[2] Santos-Paulino, A., & Thirlwall, A.P. (2004). The impact of trade liberalisation on exports, imports and the balance of payments of developing countries. The Economic Journal, 114,(493): F50–F72.

[3] IMF (2008). Balance of payments and investment position manual. Washington, D.C.: International Monetary Fund.