Balance of Payment
A person of one country need the currency of another country for various purposes such as trade of goods and services, foreign investment and travelling. The actual flow of currency from one country to another is in these forms of activities. The transaction of trade in terms of goods and services between specific countries is kept recorded as a form of balance of payment which can even have signal of possible shifts in exchange rate.
Although international trade is possessed in various forms, the transaction of multiple currency is common in each of them. A country keeps these transactions with other countries as a form of Balance of Payments account. A balance of payment account maintains a systematic records of these transactions conducted at some specific time period between a home country and others (those countries with which the transactions are made). A balance of payment account of a country exhibit the size of its economic activities with rest of the world (appleyard2014international).
Since Balance of Payment is a bookkeeping system for inter countries economic activities, the items with payments inward to the home country are credited while payments outward from the home country are debited. Exports, inflow of foreign investment, interest and dividends obtained from the investment made on foreign country by the home country are considered as credited items as they increase the inward flow of currency. Similarly, Imports, investment made on foreign countries, interest and dividends paid to foreign countries for their investment in home country are the items to be debited (appleyard2014international).
Balance of payment can be classified into two broad categories – a) Current Account and b) Capital Account. The items that lies in these subcategories are illustrated in table below.
| Current Account | Capital Account |
|---|---|
|
|
Balance of payment can be classified into two broad categories – (a) Current Account and (b) Capital Account. The items that lies in these subcategories are illustrated in table-(tab:bopComponents).
Current Account
Current account measures net imports and exports of a country. Imports and exports are divided into three sub categories -(a)Trade of goods, (b) Trade of services and (c) Income,
which includes the interest and dividend payed to international firms operating within home country and interest and dividends earned from domestically owned firms abroad (krugman2006international).
The current account balance is the difference between export and import. When export of a country exceed its import, there is current account surplus and when import exceed export there is a current account deficit.
\[\begin{equation} \text{Current Account}=\text{Total Exports}-\text{Total Imports} \end{equation}\]Above equation can also be expressed as a form of income and expenditure like in equation-(curAccBal2) which is the difference between Total National Income and Total Domestic consumption (krugman2006international).
\[\begin{equation} \label{eq:curAccBal2} \text{Current Account Balance}= \underbrace{\text{Y}}_\text{GNP}- \underbrace{\left(\text{C}+\text{I}+\text{G}\right)}_{\substack{\text{Total Domestic}\\\text{Consumption}}} \end{equation}\] where,| C | = | I | = | G | = |
Current account incorporates a wide range of international transactions so there is a vital role of exchange rate in each of those transaction. This thesis has considered the monthly data for imports and exports of goods which is available from Statistics Norway. In Norway, current balance is highly influence by the balance in goods. Figure-(fig:curBal) shows that the balance in services in Norway is decreasing while the balance in Goods has boost up after around 1998. Further, the balance in services plotted in the same figure from the quarterly data exhibit a seasonal trend which is usual in Norway.
Imports
Machinery & equipment, chemicals, metals and food stuffs are major imports of Norway. Sweden (13.6%), Germany (12.4%), China (9.3%), Denmark (6.3%), UK (6.1%) and US (5.4%) are major import partners (Source: cia.gov). The monthly imports of new ships (ImpNewShip), oil platform (ImpOilPlat), old ships (ImpOldShip) and all other items excluding ship and oil platform (ImpExShipOilPlat) are considered as predictor variable in data analysis. The time-series plot for these variables are presented in figure-(fig:tsPlotImp)
Exports
Norway is richly endowed with natural resources – petroleum, hydro-power, fish, forests, and minerals but the economy is highly dependent on the petroleum sector (Source:cia.gov). Petroleum products, machinery and equipment, metals, chemicals, ships and fishes are major exports of Norway (Source:cia.gov). The monthly time series for the Export of condensed fuel (ExpCond), crude oil (ExpCrdOil), natural gas (ExpNatGas), new ships (ExpNewShip), oil platform (ExpOilPlat), old ships (ExpOldShip) and all other exports excluding ships and oil platforms (ExpExShipOilPlat) are presented in figure-(fig:tsPlotExp).
