Teaching Case – Balance of Payment for Kowloon True Light School at The Chinese University of Hong Kong

On 21 December 2022, 22 students from the Kowloon True Light School visited The Chinese University of Hong Kong and participated in the Balance of Payment Teaching Case workshop prepared by 2 student helpers from the Department of Economics. We made some adjustments to the game design of the teaching case after the test run in 2021 and prepared a presentation deck covering the macroscopic view of the concept of the BOP account to the students.

In the teaching case, we first gave a brief introduction to the Balance of Payment Account to the students. The Balance of Payment Account records all the international transactions between two countries. It is further classified into Current Account and Capital Account. The Current Account records all the international transactions that arise from the export or import of goods and services, and the Capital Account records all the international transactions that arise from the purchases and sales of financial assets. In international trade, these two accounts are balanced in nature: For instance, if we purchase a good from a foreign country with HKD 100, we will get a unit of good worth of HKD 100 from the foreign country. At the same time, the foreign country gets 100 HKD worth of assets from Hong Kong since we have to pay for the good. Therefore, while there is a debit of 100 HKD in the Current Account because of the import of goods, there is a credit of 100 HKD in the Capital Account at the same time because there is an outflow of 100 HKD to the foreign country. Therefore, taking into factor both the Current Account and Capital Account, the Balance of Payment is now balanced.

In the next step, we let the students participate in the trading game we adjusted. 4 different materials were used in the game: Paper sheets (which are used to make paper blocks), scissors, tape and paper money. Their mission is to use scissors and tape to build up as many paper blocks as they can. The students were first separated into 7 groups, and each group was given with different sets of materials. They then had to trade with other groups to exchange the materials required to build up paper blocks. The students were fully engaged in the game and some groups successfully built a large number of paper blocks using their trading strategies.

Students particpaitng in the trading game (faces of students are blurred owing to privacy) 

After the game, we further guided the students to reflect on their records of trading activities during the game and they observed that the Balance of Payment Accounts in all groups are balanced. We hope to help the student understand the relationship between the Current Account and Capital Account through hands-on experiences.

Materials used in the trading game

Then, we gave some basic ideas of the surplus and deficit of the Current Account and the Capital Account. When the value of export is greater than the value of import, a current account deficit will exist, and vice versa. On the other hand, when the outflow of domestic assets is greater than the inflow of domestic assets, a capital account deficit will exist. Apart from it, we also invited students to discuss whether a current account deficit is a bad thing for the country. Sometimes students may be distracted by the term ‘deficit’, and sometimes think that it is always bad for a country to get into debt. However, this may not be the case. For instance, if a country faces a current account deficit due to the accumulation of capital goods bought from other countries to support its future development, it may in fact accelerate its economic growth in the future. Therefore, whether Current Account deficit is a bad thing or not, in fact, depends on what you are borrowing money for. Finally, we gave a brief introduction to the relationship between globalization and Balance of Payment Account and how recent global issues may affect the Balance of Payment Accounts of some countries, such as the War of Ukraine, and also the rising attention on making investments in preventing the next pandemic, as advocated by Bill Gates and some other leading countries of the world.