Balance Of Payments

A country's balance of payments (BOP) accounts is a systematic statement of all economic transactions between that country and the rest of the world It involves transactions of goods and services and movements of assets.
These transactions are either a debit or a credit entry in the accounts of the country.

• Transactions that the earns a country foreign currency is entered as a credit(loans Inclusive)
• Transactions that involve spending foreign currency are entered as debits

Such Transactions associated with BOP includes those on

• Goods
• Services
• Assets

The Balance of Payment Account is normally divided into two parts;

1. The Current Account
2. The Financial Account(Also known as the Capital Account)

The Current Account

The Current Account of records all visible (merchandise) trade/goods, invisible trade (services) as well as unilateral transfer payments. Thus BOP on current account refers to Merchandise balance, Services balance, and Unilateral Transfer balance. Is is "one-way" meaning: the country giving such transfers do not receive anything back from the other party. It involves gifts to governments and foreign aid.

The current account records transactions for goods and services, interest and transfers.
From this, we know that the current account can be subdivided into the;
Visible and Invisible account;
The Visible Account records transactions in physical goods such as;
Cocoa, Gold, Oil, and Timber

The Invisible Part of the Account will comprise of;

• Transactions from the imports and exports of services
• Payments of Investment Income(NB: Not investment itself but the income from investment)
• Unilateral Transfers

The balance of Trade and Balance on the Current Account

The balance of trade is the difference between exports of goods and services and imports of goods and services. 

The Balance of trade is the largest component of a country's balance of payments.

The Balance on Current Account consists of net exports of goods, plus net exports of services, plus net investment income, plus net transfer payments. 

It shows the difference between how much a nation has spent and how much it has earned.

The Capital/Financial 

The Capital Account records all international transactions that involve a resident of the country concerned changing either his assets with or his liabilities to a resident of another country. The Capital Account takes care of transactions that either increase or decrease a country's assets or liabilities.

The Capital Account involves transactions such as;

• Unilateral transfer of Assets 
• Debt Forgiveness 
• Remittances from international migrants

Whiles the Financial Account includes the following;

* Sale of county's asset; E.g. GT Bank sold to Vodafone

* Direct Portfolio Investments(NB: the return on this investment will be under CA)

* Purchases of Sovereign Bonds

Official Settlement Balance

This balance refers to the net change in a country's reserve asset held by a country.

Official reserves assets include gold, foreign currencies, Special Drawing Rights(SDRs) and reserve positions in the IMF.

Includes activities in relation to financial transactions involving 

• The Central Bank of a country and the IMF
• The Reserve Assets

When a country runs a BOP surplus, its net holdings of reserve assets will increase.

The balance of Payment Disequilibrium

Balance of Payments disequilibrium occurs when payments on a country’s imports exceed the receipts from its exports or when the receipts from a country’s exports exceed the payments from its exports.

That means a disequilibrium can only occur in the current accounts. When such disequilibrium occurs, it is financed from the Capital Account to ensure equilibrium. For this reason, we say The BOP always Balances!!!

Deficit versus Surplus Balance of Payment

A deficit balance of payments occurs when payments on a country’s imports exceed the receipts from its exports

Balance of Payments is said to be a surplus when the receipts from a country’s exports exceed the payments from its exports.

Balance of Payment Transactions

Transactions are either debit or credit transactions

All transactions that bring receipts from foreigners are credit transactions

• Merchandise exports 
• Transportation and travel receipts
• Income received from investments abroad
• Gifts received from foreign residents
• Aid received from foreign governments

Transactions that involve payments to foreigners are debit transactions 

• Merchandise imports
• Transportation and travel expenditures
• Income paid on investments of foreigners
• Gifts to foreign residents
• Aid given by home government
• Overseas investments by home country residents

Every credit transaction has a balancing debit transaction, and vice versa, so the overall balance of payments is always in balance.

A statistical discrepancy is computed where the bop is not in balance to make up for any shortfalls.

Discrepancies proceed from:

• Under-reporting investment incomes
• Under-reporting merchandise imports
• Under-reporting capital exports

People hide these transactions from governments for the purposes of tax avoidance or some other reason.

Financing The Balance of Payment Deficit

There are short-term measures to  correct balance of payments deficit:

Borrowing from Domestic sources:

1. Government borrowing domestically from the central bank
2. Government borrowing domestically from the public e.g. sale of bonds

Borrowing from External Sources:

1. Borrowing from trading partners.
2. Borrowing from international organizations such as the IMF and the World Bank.
3. Borrowing from international capital markets e.g. Euro Bonds

Unemployment

Who are the Unemployed?

The unemployed refers to those who are not employed but are actively looking for work. Thus, those who have made specific efforts to find work in a specified period

The Unemployment rate

The unemployment rate is the fraction of the labor force that is unemployed. That is the unemployed population divided by the sum of the employed and the unemployed. The unemployment rate does not matter whether you are fully employed or underemployed, all will be counted as being employed. Thus, even if you worked one hour in a particular month, you'll still be counted.

Discourage Worker

They are people without employment who have given up the search for employment. They are not part of the labor force and therefore are not counted as unemployed.

Job Acceptance

This refers to workers who are prepared to accept work at the going wage rate

Unemployment Spell & Unemployment Duration

The number of times that an unemployed person remains continuously unemployed is called an unemployment spell. For example an individual who starts the year with a job but loses it around March, finds a new one in June (Spell 1, duration 3mths) and holds on to it until October when he loses that job for and remains unemployed until the end of the year (Spell2, duration 2 months) will have had two spells of unemployment during the year.

The length of time an unemployment spell lasts is called the duration of that spell.

TYPES OF UNEMPLOYMENT

There are three main types;

Structural Unemployment

This occurs when the structure of the economy changes. Jobs may move from certain sectors to others. E.g. Improved tech has made typewriters and producers of typewriters no longer exists. Here we say there is a mismatch of skills available & demand for the work.

Frictional Unemployment

This refers to the time taken to find a job. It includes fresh School Graduates who are waiting for job postings and people already working who have quit to work elsewhere. It can never be zero.

Cyclical Unemployment

Associated with the business cycle. (the ups & downs in the economy). When the economy goes down(in a recession), people will be fired because demand for goods and services is low and production has to be lowered to reduce wastage. It affects all sectors.

The Natural Rate of Unemployment

The natural rate of unemployment is a combination of frictional, structural, and surplus unemployment. Even a healthy economy will have this level of unemployment because workers are always coming and going, looking for better jobs. This jobless status, until they find that new job, is the natural rate of unemployment. It is the rate of unemployment when the labor market is in equilibrium.

The following factors affect the natural rate of unemployment;

1. Mobility of Labour
2. Skills & education
3. Availability of job information

Cost of Unemployment

The cost of unemployment can be categorized into Economic Costs and Social Costs.

The main economic cost of unemployment is the loss of output. It is very obvious that when many people are not working, the total output will be lesser than what would have been achieved if everyone was working.
We can further support our claim to loss of output with Okun's Law

Okun's Law

According to Okun's law for every 2% fall in GDP relative to the potential (or full employment GDP) the unemployment rate rises by about 1 percentage point. That is if unemployment increase by 1%, GDP will decrease by 2%.

Other Economic costs of Unemployment include:

1. Loss of skill
2. Reduction in government revenue

Social Costs of Unemployment

1. Psychological impacts due to unemployment
2. Increase in Social vices & crime
3. Poor mental Health of individuals

The Philip's Curve

The curve shows the relationship between unemployment and inflation.

The Short Run Philip's Curve

The Short-run Philip's Curve is downward sloping. This is because; attempts to Decrease Inflation increases the rate of Unemployment whereas attempts to Decrease Unemployment Increases Inflation.

Why?
Case 1: Reduced Unemployment; Increased Inflation

• When we want to reduce unemployment, Government will have to pump more money into the economy.
• This increase AD
• As such, the equilibrium output must increase to catch up with the increased AD.
• Output can only increase by employing more people to work.
• This reduces unemployment
• Inflation will rise (demand Pull) as a result of more money chasing relatively fewer goods.

Case 2: Reduced Inflation; Increased Unemployment

• When Government wants to reduce inflation, it will have to reduce the money supply
• Reduced money supply means AD will reduce
• When this happens, equilibrium output must fall
• Output falling means fewer people will be required to worked and more will be laid off

The Long Run Philip's Curve

In the long run, there is no negative or no relationship at all between inflation & unemployment. It is determined by the Natural rate of Unemployment which is the nonaccelerating rate of unemployment or unemployment at Full employment.

Who Qualifies as Employed or Unemployed?

People are considered employed if they did any work at all for pay or profit during the survey reference week. This includes all part-time and temporary work, as well as regular full-time, year-round employment. Individuals also are counted as employed if they have a job at which they did not work during the survey week, whether they were paid or not.

People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.

 Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.

Institutionalized Population

People who are primarily ineligible, unable, or unlikely to participate in the labor force while residents of institutional group quarters. They reside in institutional group quarters such as adult correctional facilities, juvenile facilities, skilled-nursing facilities, and other institutional facilities such as mental (psychiatric) hospitals and in-patient hospice facilities.

Civilian and non-institutionalized adult population

Anyone over a certain age cut-off point (usually 16) who (a) isn't in the military, (b) isn't in jail or prison, (c) not living permanently in nursing homes, and (d) not in other institutions. That is (Total Population - Under 16 - Noninstitutionalized). In the context of the labor force, the non-institutionalized adult is the adults who are (a) working and on a payroll (i.e. employed people), or (b) actively seeking work (unemployed).

The Labor Force Participation Rate.

This measure is the number of people in the labor force as a percentage of the civilian noninstitutional population 16 years old and over. In other words, it is the percentage of the population that is either working or actively seeking work.

The Employment-Population Ratio.

This measure is the number of employed as a percentage of the civilian noninstitutional population 16 years old and over. In other words, it is the percentage of the population that is currently working