Balance of Payments

1. Balance of Payments 4.5

2. Current Account • The Balance of Payment is a record of all in – and outflows in a country arising from economic activity in the domestic and foreign sectors during a given time period. The balance of payment consists of the current account and capital account. • A record of the value of all the transactions between the residents of one country with the residents of all other countries in the world over a given period of time. • Current account balance = Balance of trade in goods + The balance in trade in services +Net Income flows

3. Current Account • Balance of trade in goods (visible) • Revenue received from the export of tangible goods minus the the expenditure on the imports of tangible goods. • When expenditure revenue in exports is greater then the amount spent on imports then there is a surplus on the balance of trade in goods – the other way around it is a deficit on the balance of trade in goods.

4. The balance in trade in services • Also know as invisible. • Same as visible revenue received from the exports of services minus the expenditure on the imports of services. • Examples – banking, insurance, tourism, (tourist from country A spend money in the countries B money coming into money B and out of country A)

5. Net Income flows • Net investment incomes (net factor income from abroad) • Measure of net monetary movement of profit, interests and dividends moving into and out of the country. • Domestic firms have branches in other countries, profits will be sent back. • Investments in another countries banks will lead to a gain or payments to another country or resident will count as negative. • Purchasing shares in foreign firm may lead to dividends which will be positive or of course if they leave the country will be negative.

6. Net transfer of money • Payments between counties when no good or services change hands. • Foreign grants and loans . • Remittance, by workers, private gifts.

8. Capital Account • Buying and selling of assets between countries. This can include anything that can be owned and has value. • Land, real estate, companies, stocks/ shares etc. • Capital account measures the net change in foreign ownership of domestic assets • If foreign ownership of domestic assets increased more quickly than domestic ownership of foreign assets then there is more money coming in to the country than going out so there is a capital account surplus. - if it is the other way than there is a capital account deficit.

9. Assets that represent ownership • Buying property or a business, stocks etc – the main goal of for the asset to have a positive return in the future by making a profit or increasing in value. • May not make any profit and the investment does not have to be paid back.

10. Assets that represent lending • Treasury bonds, government bonds. The investors lends the money in order to purchase the assets in the expectation that interest will be paid on the investment and then also a later date they will also get all there money back.

11. Imbalance • If the current account is in deficit than the capital account will have to balance this out by being in a surplus. • Foreign reserve may be used to increase the capital account – can not be sustained long term • Foreign ownership in a country means they must have faith in the domestic country but at the same time national sovereignty may be an issue. • May be financed by high lending from abroad. Country may withdraw their money and put in other places.

12. Current account in surplus • Current account surplus allows a country to have a deficit on its capital account by building up its reserve or by purchasing assets abroad. • A surplus will also usually lead to an appreciation of the currency on the foreign exchange markets there is a demand for the currency.

13. How to correct a current account deficit. • Depreciate the value of their currency to enable exports to be cheaper and imports to be more expensive. • Protectionism – restriction of imports, (embargo, tariffs, quotas etc) – WTO may step in. • Expenditure policy – reduce overall expenditure including imports.

14. Do some more research to answer the question • Is a current account or capital account deficit or surplus a good or bad thing? • How “big” does a country allow its current account of capital account deficit or surplus get before it should be worried? • What have been some of the recent trends in countries with reference to their current account or capital accounts deficits and surpluses (use specific counties and give examples)