The authorities of any country, in order to choose the right monetary, tax, foreign exchange policy, must be well versed in the mechanisms of interaction of macroeconomic indicators at the international level. It is necessary to monitor changes in international economic relations in order to identify emerging problems in time. Information for this gives the balance of payments.
The balance of payments is a systematic record of all economic transactions between the residents of a given country and the rest of the world over a specified period of time, usually a year.
An economic transaction is an act of exchange in which ownership of a good is transferred or a service is provided by a resident of one country to a resident of another. Any transaction has two sides - credit and debit.
From the point of view of a given country, the parties to a transaction are defined as follows: the movement of goods and services abroad,
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accompanied by the counter movement of money (export), and hence the inflow of capital from other countries, is a loan (cash comes with a plus sign); the movement of goods and services from abroad, for which the residents of the country must pay (imports), therefore, the outflow of capital to other countries is a debit (cash comes with a minus sign).
The balance of payments consists of two streams: a) real resources - exports and imports of goods and services; b) financial resources corresponding to them, which are a payment for the acquisition or payment for the sale of financial resources.
To understand and analyze the balance of payments, it is necessary first of all to recall the basic principles of its construction:
Every international transaction is automatically reflected in the balance of payments twice: once as a credit and once as a debit. This principle of accounting for the balance of payments is correct because every transaction has two sides: if you buy something from a foreigner, you must pay him in one way or another, and this will definitely be reflected in your country's balance of payments. One can never be sure in advance exactly where the “free end” of a given transaction will manifest itself, but somewhere it will certainly manifest itself;
the establishment of economic territory is important for the balance of payments. An economic territory is a geographical area under the jurisdiction of the government of a given country, within which labor, goods and capital move freely. In addition to the territories defined by the state border, it includes: adjacent islands (if their economy is subject to the same monetary and fiscal authorities as the economy of the mainland); territorial waters within which the country has the exclusive right to fish and extract natural resources; territorial enclaves located in other countries (for example, free economic zones);
the balance of payments reflects transactions carried out by residents of a given country. Residents are households or legal entities that have been in the country for more than a year and have their center of economic interest in it. They cannot include tourists, personnel of international organizations, personnel of foreign embassies, military personnel and their families, foreign students. In contrast, foreign entrepreneurs and foreign workers are considered residents;
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4) for registration in the balance of payments, only market prices are used, i.e. prices at which transactions are concluded between an independent buyer and an independent seller. These prices should be distinguished from exchange quotations, world market prices and any other generalized price indicators;
it is necessary that the time of registration of credit and debit records coincide;
when preparing the balance of payments, the country must use the unit of account that it uses in internal settlements and accounting. For conversion into foreign currency, the exchange rate of the national currency is used, which actually operated on the market on the date of the balance of payments compilation.
The sources of information for compiling the balance of payments are:
customs statistics (transactions with goods registered by the customs authorities);
money sector statistics (data on foreign assets and liabilities of the central and commercial banks);
external debt statistics (data on stocks, flows and payments on public and private external debt of residents to non-residents, accumulated by the ministry of finance or the central bank);
statistical surveys (data on international trade in services, labor income, migrant remittances, information on direct and portfolio investment);
statistics of operations with foreign currency.
Transactions between countries and the rest of the world are divided into two groups: current transactions and capital transactions. These groups are reflected in the balance of payments in the current account and capital account.
Transactions recorded in the current account are the sale AND purchase of goods and services (balance of trade), as well as unilateral payments (transfers) made by one country to another without receiving a good or service in return (for example, money transfers that a citizen one country, who went to work in another, sends his family, or foreign aid).
The capital account records the sale and purchase of assets, as well as borrowing and lending.
There is also an official reserve account. It reflects the change in the reserve assets of the government of a given country and foreign governments.
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Each account in the balance of payments has a balance. If the absolute value of the loan is greater than the absolute value of the debit, then the balance will be positive, if vice versa, it will be negative. The trade balance is important. If export earnings exceed import costs, then the trade balance has a positive balance, otherwise it is negative.
There is a link between the balance of payments accounts. The current account and the capital account are reflections of each other. A current account deficit indicates that a country's exports of goods and services are insufficient to pay for imports of goods and services. How to finance this deficit? The country must either borrow from a foreign partner or give up ownership of some assets, which will be reflected in the capital account with a plus sign.
Example. Let's assume that in some period of time your expenses will exceed your income. To finance the deficit, you can sell some of the assets (for example, a music center) or borrow. So does a country: to finance its current account deficit, it sells assets or borrows. This is what finds expression in the positive balance of the capital account.
In the opposite situation, when the country has a positive current account balance, i.e. its export earnings exceed its import costs, it can lend (not without benefit to itself) money to other countries, which means capital outflow and finds expression in a negative balance of the capital account.
As a result, the sum of the balance of the current account and the capital account should give zero. However, in practice, most often the balance of payments of countries have either a negative or a positive balance. A deficit means a net outflow of money from a country, and a surplus or surplus means a net inflow of money from abroad. In this regard, the question arises: is a deficit always a bad thing, and an excess always a good thing? There is no single answer, it all depends on the specific circumstances.
Example. Japan had the world's largest current account surplus in mid-1990, grew at 5%, and prices grew at half the pace of other industrialized nations, but the yen weakened and the stock market tumbled . The problem was the state of the country's basic balance sheet. The current account surplus in the balance of payments was largely offset by capital outflows. Great Britain in the same period was in the worst position of all industrialized countries, since its current account deficit exacerbated-
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Xia outflow of capital, resulting in a negative balance of payments amounted to 10% of GNP - this is the highest deficit balance in the group of industrialized countries. The US current account deficit was balanced by capital inflows, which did not solve the problem in the long run. Germany was in the best position, it had a huge current account surplus compared to other countries (like Japan) and low capital outflow, so its balance of payments surplus was the largest in the world.
There are three main ways to eliminate the surplus or deficit of the balance of payments:
stop the flow of trade and capital;
correct domestic economic distortions;
forced or permissive to achieve a change in the exchange rate.
The system of accounts of the balance of payments is somewhat similar to a movie camera: both cannot show us what is going well and what is bad, they simply record what is happening, thereby helping to draw conclusions (in our case, about economic policy).
There are three situations in which the information contained in the balance of payments is especially needed:
records of the results of exchanges between countries make it easier to judge the stability of the floating exchange rate system; the balance of payments helps to reveal the accumulation of currency by people who are interested in owning it (residents of the currency of a given country), and those who are inclined to get rid of this currency (foreigners);
in conditions of fixed exchange rates, the balance of payments helps to determine the size of the accumulated currency in the hands of foreigners in order to make a timely decision to support a fixed exchange rate if it is threatened by a crisis;
balance of payments accounts provide information on accumulated debt, interest and principal payments, and a country's ability to earn currency for future payments. This information makes it possible to estimate how difficult (or more expensive) it is for the debtor country to repay debts to foreign creditors.
The balance of payments of the Republic of Belarus is a statistical report, which contains in a systematic way data on the country's foreign economic operations for the reporting period. The balance of payments is compiled by the National Bank of the Republic of Belarus on a quarterly basis according to the methodology developed by the International Monetary Fund.
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The information basis of the balance of payments of the Republic of Belarus is the reporting data on all foreign economic transactions of residents of the Republic of Belarus, provided by the Ministry of Statistics and Analysis, the Ministry of Finance, the Ministry of Internal Affairs, the State Customs Committee, the Belarusian Railways, the concerns "Belenergo", "Belneftekhim", the state enterprise " Beltransgaz”, as well as estimates from the National Bank.
At present, the analytical and standard presentation of the balance of payments is practiced.
Payment balance - it is a systematized record of all economic transactions made by residents of a given country with its non-residents during a given period.
Resident country is any person who has a main residence in a given country, regardless of his citizenship and passport status, as well as national companies operating in the country. The credit of the balance of payments accounts reflects the outflow of goods (goods, services, capital) from the country, for which the residents of this country receive payments.
Another definition is: payment balance - it is the ratio of payments received by a given country from abroad and payments made by it abroad during a certain period of time. It includes payments for foreign trade operations (i.e. the balance of trade), services (international transportation, insurance, etc.), non-trade operations (maintenance of representative offices, secondment of specialists, international tourism), as well as payments in the form of interest on loans and in the form of investment income. The balance of payments includes the movement of capital: investments and loans.
Trade balance - This is a document that reflects the movement of exports and imports of goods between a country and other states. It is compiled for the month, quarter and year and reflects the actual payments between the country and other states for the movement of goods; it is also called the "Visible" trade balance.
Active balance of payments - a country's balance of payments in which the amount of foreign receipts exceeds the amount of its foreign expenditures and payments.
Passive balance of payments - a balance sheet in which the amount of the country's foreign receipts is less than the amount of capital outflows abroad.
Balance of international settlements - the ratio of monetary claims and liabilities, receipts and payments of one country in relation to other countries. The main types of balance of international payments are: balance of payments, settlement balance, balance of international debt.
Account balance - In accounting, the balance of an account is the difference between the amount of credit entries and the amount of debit entries. It is determined at fixed intervals: monthly or weekly - for debits or credits, annually - for the annual report.
Structure of the balance of payments
Under benefits in this case, not only goods and services are understood, but also the obligations of residents, therefore loans abroad are also reflected in the credit of the balance of payments. In the structure of the balance of payments, there are three types: 1) trade balance; 2) balance of current operations; 3) total balance , or balance of official accounts. Each of these balances can be reduced to a positive or negative balance.
Trade balance represents the value of exports of goods minus their imports - it is thus only tabulated under trade flow items.
Current account balance summarizes information not only on the trade balance, but also on exports and imports of services, as well as on unilateral transfers (pensions, gifts, money transfers abroad or gratuitous assistance to foreign states). A positive current account balance indicates that the country is a net investor in relation to other countries. Conversely, a current account deficit means that a country's foreign investment abroad is reduced and it becomes a net debtor to pay for additional, or net, imports of goods and services. In other words, the current account balance is the difference between national income and national spending."Under the line" of the balance of current operations reflects information about the flows of capital and reserves. Capital flows into and out of the country, i.e. purchases of long-term assets by non-residents, which may give rise to direct claims abroad (in the form of restrictions on the use of profits from the operation of these assets), are given in balance of capital movements. By debit accounts of the balance of payments is reflected inflow of financial resources to this country, for which its residents will have to make payments. Lending to foreigners is also treated as a debit transaction, i.e. as an import of international obligations. For the same reason, an increase in a country's official reserves is reflected by debit , and the decrease on credit. The total amount of credit must be equal to the total debit of the balance of payments. Then the state is reached equilibrium of the balance of payments.
Information on the current balance of payments and the balance of capital movements is summarized in balance of official accounts , which compares accumulated reserves with growth in liquid liabilities to foreign authorities. A deficit in the balance of official settlements leads to an increase in foreign exchange inflows into the country, and a surplus leads to a decrease. The balance sheet of official accounts is usually referred to as balance of payments balance.
Links between the budgetary, financial and external sectors of the economy and the world economy
The external sector is directly related to the state budget of any country. The sum of all types of budget revenues must be equal to the sum of all types of budget expenditures. Budget revenues typically include current tax revenues, capital investment income, and government grants, while expenditures include current government spending, capital investment, and net lending. Net loans can also be considered financing, which blurs the distinction between financing that is a public policy objective and financing that is provided for public liquidity management purposes. Taxes and other fees that go to budget revenue reduce aggregate demand in the economy by reducing the purchasing power of the private (non-state) sector. Government spending, carried out at the expense of the budget, increases aggregate demand and, along with the consumption of enterprises and households, is the most important part of gross consumption in the economy. Government consumption includes government spending on goods and services, including the income of workers and employees in the public sector of the economy. Budget balance (fiscal balance) - the difference between the amount of revenues to the budget and the total amount of its expenditures. The balance can be positive or negative.
Institutional units are divided into two main groups:
- 1) governing monetary authorities or "financial authorities" (monetary authorities) - this is how the central (state, national) bank and ministries of finance are currently called, i.e. decision-making bodies of the state in the financial and banking sector. This includes:
- - assets (assets) - the sum of net foreign assets of the banking system (including net state reserves), valued in national currency, and net domestic credit provided by the banking system,
- - Liabilities - liabilities of the banking system to the private and public sectors. They represent the money supply, consisting of cash in circulation, deposits and other monetary instruments;
- 2) net international reserves held by the central bank and controlled by the state, and net international assets of commercial banks and other financial institutions: they constitute the total volume of net foreign assets.
All this complex financial and economic subsystem of the countries of the world is woven into the fabric of the world economy (including its financial subsystem), the movement of goods and services, and financial flows. At the same time, one significant regularity emerged: the more open and developed economically and technologically a country is, the more it internationalizes and the more "densely" enters the world economy and the world financial system.
Balance of payments items are grouped according to the approximate scheme recommended by the IMF. Therefore, the balance of payments of any country looks like this:
Section A. Current operations (balance of current operations).
1 Goods (trade balance).
2 Services (balance of services).
3 Income from investments (balance of interest payments).
4 Private one-way transfers.
5 State unilateral transfers.
6 Other services and income.
Section B. Direct investment and other long-term capital.
1 Direct investment.
2 Portfolio investment.
3 Other long-term capital.
Section C. Other short-term capital.
Section D. Errors and Omissions.
Section E. Compensatory Articles.
Section F. Extraordinary sources of coverage (financing) of the balance.
Section G. Required Reserves of Foreign Authorities at the Central Bank.
Section H. Total change in reserves.
Each section (item) of the balance of payments indicates the movement of funds (receipts or payments) for each group of foreign economic transactions.
Section A:
1 Item “Goods” (trade balance) reflects the balance of payments for export, import and re-export transactions. Moreover, the balance of payments includes only actually made or immediately made payments on foreign transactions.
The balance of trade clearly reflects the role of foreign trade in achieving the macroeconomic balance of the national economy, since it is based on the difference between merchandise exports and merchandise imports. A positive or negative trade balance largely determines the state of the balance of payments as a whole. For most countries, the equilibrium of the balance of payments is more dependent on the equilibrium of the trade balance.
2 The item “Services” (balance of services) includes receipts and payments from exports and imports of a country's services on the world market. This includes services such as transport, financial, computer, communication, construction, insurance and other services provided by residents to non-residents and vice versa. The importance of the balance of services is increasing, especially in developed countries, due to the accelerated development of the non-manufacturing or service sector in them.
3 The item “Income from investments” (balance of interest payments) shows the difference between payments for loans granted by the country and interest payments on loans received, as well as the ratio between income from investments exported and imported into the country.
Investment income includes:
– income from direct investment, i.е. income of a direct resident investor from capital invested by him in a non-resident enterprise, and vice versa;
– income from portfolio investments, which are cash flows between residents and non-residents arising from the sale and purchase of securities;
– income from other investments, i.e. receipts and payments on any other financial claims of residents against non-residents, and vice versa.
If foreign capital invested in a given country yields less returns than domestic capital invested abroad, then net investment returns are positive, otherwise they are negative.
4 The item “Private unilateral transfers” (transfers) reflects the intercountry transfer of material resources without a value equivalent. This includes current transfers from the government and other sectors. The former reflect current transfers for international cooperation, various types of humanitarian assistance, etc. The second is money transfers between individuals and non-governmental organizations (residents and non-residents), for example, transfers to relatives, wages to employees, alimony, etc.
The value of private transfers depends on which of the counter flows of transfers will be more intense: from the country or to the country.
5 The article “State unilateral transfers” includes paid and received subsidies, income (expenses) from the maintenance of military bases, embassies, consulates, representative offices (trade, military), etc.
6 The article “Other services and incomes” is not subject to deciphering, since this most often includes the purchase and sale of weapons by the country, the financing of military-political actions, etc.
Sections B and C reflect the balance of capital movement, i.e. the ratio of import and export of state and private capital. Depending on the timing of movement, there are:
– long-term operations(acquisition and construction of enterprises, purchase and sale of securities, obtaining and providing long-term loans and government loans, etc.). Such operations are carried out for a period of more than 2 years;
– short-term operations(loans in cash and commodity form for up to 1 year, movement of funds on current accounts in foreign banks, import and export of capital, national currency and currency values, etc.).
Section D groups articles that correct statistical errors from sections A, B, C, and also includes data on the volume of GDP and the size of central bank reserves.
The balance of sections A, B, C, D in some countries is regarded as the result of the balance of payments. The IMF recommends including in the final balance also sections E, F, G for greater reliability. They include reserve (compensating) items that characterize the sources and methods of paying off the balance of payments: the movement of gold and SDRs, the state of the country's reserve position in the IMF, the central bank's gold and foreign exchange reserves, IMF loans, etc.
Section H shows the final state of the listed sources after the compensation of the balance of payments.
The country's balance of payments can have both a positive and a negative balance: in the first case, it shows that the country received more various assets, and in the second, that their outflow from the country exceeded the inflow. And this, in turn, can have both positive and negative consequences for the country's economy. Thus, a permanent negative current account balance leads to the depreciation of the national currency and encourages the attraction of foreign capital. At the same time, it is important for the economy in what form the inflow will take place, since in this case, particular importance is attached to foreign direct investment.
An influx of long-term entrepreneurial investment can help revive the economy, although it will require further payment of income from them to foreign investors. Long-term public and private bank loans will increase the country's external debt,
and its maintenance will become more and more expensive over time.
A stable current account surplus creates the basis for capital outflow and strengthens the position of the national currency. Negative consequences for the national economy can also cause sharp fluctuations in the current account balance - an increase in the negative balance destabilizes foreign economic operations, as it provokes inflation and depreciation of the national currency.
In any case, the state of the balance of payments most clearly characterizes the general state of any national economy.
Conclusions:
1 Balance of payments is the ratio between payments received in the country from abroad and payments paid by the country abroad. The final balance of payments can be positive or negative, which reflects either the excess of inflow over the outflow of payments into the country, or the excess of outflow over the inflow of payments from the country.
2 Balance of payments consists of several sections that reflect the movement of assets for certain groups of foreign economic transactions.
Sections A, B, C are the main ones, as they reflect the international movement of real material values. Sections E, F, G, show reserve, offsetting assets used to pay off a negative balance of payments. Section H reflects the final state of the reserve sections after the compensation of the balance.
1. General concept, characteristics and principle of construction of the balance of payments.
The movement of goods and services across national borders is, as it were, balanced by the movement in the opposite direction of financial flows, which are payments for goods and services. These flows are recorded and summarized in the items of the balance of payments.
The balance of payments is understood as a statistical record of all economic transactions or obligations carried out during a certain period of time between residents of a given country and residents of any other countries in the world.
The balance of payments records the state of payments and receipts of a given country. The International Monetary Fund characterizes the balance of payments as "a statistical record of all economic transactions during a given period between residents of reporting countries."
This wording needs some clarification. First, consider Pontius "resident". Diplomats, soldiers, tourists, even if they are outside the territory of their country, act as residents of the state of which they are citizens. This also applies to the firm. She serves as a resident of the state where she is registered, but not where she operates.
The exception is international organizations that are not residents of the country where they are located.
Secondly, it is necessary to clarify that the balance reflects not individual, but aggregate transactions between a given country and other states. The usual term or period covered by the balance of payments is one year.
The term “transaction” refers to any exchange in which a good, economic service, or ownership of an asset passes from a resident of one country to a resident of another.
The basis of the balance of payments is a grouping of all types of transactions, the results of which are associated with an increase in demand for goods and services or the inflow of foreign currency.
Combining exports and imports of goods, services, interest and dividends, unilateral transfers and transfers, received and provided long-term and short-term loans, as well as the inflow and outflow of government reserves, we get a document called in the international economic literature "balance of payments".
The types of transactions can be conventionally grouped into three groups: current account transactions, which primarily include export-import operations; transactions related to the movement of capital; official reserve accounts.
The first group of transactions registers transactions related to the transfer of ownership of goods and services, the second group - with the transfer of ownership of capital; the third group registers the purchase of official reserves in the central state bank of the country. For those states whose currencies are themselves part of the government reserves of other countries, the third group reflects the acquisition of currencies by other states.
The structure of the balance of payments.
The first attempts to take into account the scale and assess the consequences of international economic transactions date back to the end of the 14th century. By the beginning of the twentieth century. the methods of compiling the balance of payments have been most fully developed in the USA and England. The first official publication of the balance of payments was prepared in 1923 on the basis of 1922 figures.
According to the nature of transactions, published balances of payments include two main sections:
I. "Balance of payments for current operations":
a) payments and receipts on foreign trade operations, or trade balance;
b) the balance of services (international transportation, freight, insurance, etc.), income and payments on investments;
II. "The balance of capital movements (short-term and long-term operations) and credits".
The balance of capital and credit flows is followed by the item "Errors and omissions", which shows the unrecorded movement of short-term capital. The change in foreign exchange reserves reflects the international foreign exchange operations of central banks associated with the equalization of the balance of payments and maintaining the national currency.
The balance of payments scheme was created in 1947, it was published as a UN document that served as the basis for the IMF to develop the form and principles for compiling the balance of payments. The IMF, publishing the Balance of Payments Manual, continued to develop the unification of its scheme, which in general terms repeats the system for constructing balance of payments items of the leading developed countries with some changes. These changes make the scheme more universal, which makes it possible to compare the balance sheets of developed and developing countries.
Classification of balance of payments items according to the IMF methodology.
A. Current operations
Investment income
Other services and income
Private one-way transfers
Total A: current account balance
B. Direct investment and other long-term capital
Direct investments
Portfolio investment
Other long-term capital
Total: A + B (corresponds to the concept of basic balance in the United States, valid until 1958)
C. Other current capital
D. Errors and omissions
Total: A + B + C + D (corresponds to the concept of liquidity in the USA, introduced since 1958)
E. Balancing items
Revaluation of gold and foreign exchange reserves, distribution and use of SDRs
Movement of the gold and foreign exchange reserve
Extraordinary sources of balance coverage
Liabilities constituting foreign exchange reserves of foreign authorities
Total: A + B + C + D + E (corresponds to the concept of official settlements in the USA since 1965)
F. Total change in reserves
Reserve position in the IMF
Foreign currency
Other requirements
IMF loans
Principles of construction of the balance of payments.
In accordance with accepted practice, the balance of payments is compiled on the principle of double counting. The latter consists in the fact that each transaction is recorded simultaneously on two accounts: a debit one, which indicates the receipt of goods or funds to this account, and a credit one, which characterizes the provision of goods or the payment of funds from this account.
Each operation carried out includes two parties, for example, the receipt of goods and its payment. After receiving the goods, you need to pay for it. Traditionally, debit entries are entered into the prepared balance sheet with a minus sign (“-”), and its credit entries with a plus sign (“+”).
To resolve the issue of which account, debit or credit, a particular transaction should be attributed to, it must be borne in mind: credit entries with a “+” sign relate to transactions, as a result of which money enters the country that makes up the balance; debit entries with a “-” sign relate to transactions in which the country spends the currency.
Export of goods and services, gifts. Capital inflows - all this is recorded on the credit account of the balance of payments with a "+" sign. Imports of goods or foreign investments, loans and credits sent abroad, gifts and pensions transferred by foreigners - all this is reflected in the debit account with a "-" sign.
There is a common misconception that the export of goods and the export of capital are considered as homogeneous types of transactions. However, in essence they are opposite. Export of goods means the inflow of foreign currency into the state supplying goods abroad, and is registered with a “+” sign. The export of capital, on the contrary, means an outflow of funds and should be recorded with a “-” sign, since it entails an outflow of currency from the accounts of residents.
The principle of double counting implies equality or zero balance. There is a certain logic here. Accounting for all transactions as a movement of goods or as a movement of capital gives a result equal to zero.
If the owner of the firm or the state spends more than it earns, then the excess of funds consumed must somehow be taken into account. To do this, either savings are used, or a loan is taken from friends or from a bank. The balance of expenses and income should always be equal to zero.
A negative (liability) or positive (assets) balance indicates an imbalance in one of the following sections of the balance of payments:
- "visible" trade associated with the sale of goods;
- "invisible" trade, which, in particular, includes various services and transportation;
The movement of capital from one country to another.
The principle of double counting used in the balance of payments involves two actions (transactions), which correspond to the entries. One action complements or is the result of another. For example, when buying a product, the buyer pays for it with money. At the same time, it is important that the primary decision was to purchase the goods, as a result, to transfer money for it to the seller, and not vice versa. Similarly, when importing goods or services, the primary will be the desire to use the services and the secondary will be the payment for the services.
This corresponds to the division of all articles into autonomous and compensatory. The main point that determines the type of transaction is the primacy or derivativeness of their occurrence.
The best rule for referring to any type of a transaction would be to identify its motives. It is practically impossible to do this.
The main (autonomous) include articles that reflect the movement of goods or capital, explained by ordinary commercial considerations; to balancing (compensating) - items reflecting the transfer of funds to ensure the movement of goods and capital.
The main items cover exports and imports of goods and services, since these are primary operations carried out on the basis of negotiations and assessment of the quality of goods. Similarly, investments in the creation of production branches will be primary (main). It can be concluded that the main items record current operations and the movement of long-term capital.
The balance of the main items, indicating the inflow of foreign funds and capital into the country (“+”) and, conversely, their outflow (“-”), that is, the “balance of payments”, which is considered in the economic literature and in official documents .
The balancing items reflect the methods and sources of settlement of the balance of payments, including the movement of foreign exchange reserves, changes in the volume of short-term assets, government assistance, government loans and credits from international financial organizations.
In other words, the balance of payments includes transactions that do not entail adequate compensation in one form or another (ie goods, services or assets). Such transactions are classified as transfers, i.e. unilateral transfers and receipts.
In this case, only one side of the transaction will be automatically recorded, and in order to have the necessary compensation in the balance of payments, entries must be made under the item of transfers. Transfers are shown as a credit when the entries they cancel are debits and as debits when those entries are credits.
For example, humanitarian aid received by a country would be reflected in the balance of payments as follows:
| Credit | Debit | |
| Import (humanitarian aid) | - | |
| Transfers (current transfers) | - |
It should be noted that the division of articles into main and balancing ones, despite outwardly clear criteria, may not be such in practice. For example, the government may raise the issue of obtaining a long-term loan in connection with a negative balance of payments. In this case, the long-term loan would, in essence, be treated as a balancing item. similarly, the introduction by the national government of a "collateral system" for payment for goods means short-term lending, which will be in the main items in the balance of payments.
In practice, one balance sheet item may reflect both stand-alone and offset transactions. finally, the same articles can be considered both as main and as balancing ones, depending on the goals that are set when balancing.
1. The balance of payments is a statistical report on all international transactions of residents of a country with non-residents for a certain period of time. It reflects the ratio between the volume of goods and services received by a given country from abroad and provided abroad, as well as changes in the financial position of the country in relation to abroad. The dynamics of the balance of payments is an important indicator for the government of any country in the conduct of economic policy, especially in the currency, monetary and tax spheres.
2. In accordance with the principles of building a balance of payments, it is always balanced. The concept of a negative or positive balance is applicable only to its individual parts. Usually, within the general balance of payments, the balance of trade, the balance of current operations, the balance of capital movements and the balance of official settlements are allocated.
2. Characteristics of articles and types of economic operations of the balance of payments.
Currency relations arise when buying and selling currency for the export and import of goods and services, investments, money transfers abroad, etc. Statistical accounting of various types of transactions of residents of a given country with all other countries is carried out using accounting accounts of the balance of payments. The main principle of their construction is the reflection of all sources of funds and the direction of their use according to standard items.
The balance of payments characterizes the ratio between foreign exchange earnings in the country and payments that economic entities make abroad for a certain period of time. In this case, the most difficult task is to account for all operations without exception. The state of the balance of payments actively influences the current market rate of the national currency, which, through feedback, affects export-import flows, the movement of capital, and the structure of the economy as a whole.
There are three parts to the balance of payments:
1. balance (account) of current operations;
2. account of operations with capital and financial instruments;
3. Balance (account) of the movement of reserve assets.
Operations in the foreign market, leading to an inflow of funds into the country's foreign exchange market, are accounted for with a "plus" sign, in the opposite case - with a "minus" sign. The final result of the three parts of the balance of payments adds up to zero. This is due to the fact that each direction of spending funds must correspond to a source.
The current account reflects transactions of foreign exchange funds associated with the current or past movement of tangible and intangible assets. First, exports and imports of goods are taken into account. Secondly, the current account records non-trade transactions - exports and imports of various types of services. These include tourism, insurance, freight and passenger transportation, communications and telecommunications, construction, financial services, payment for vacations and business trips of residents abroad. The third direction of accounting for funds in the current account includes cash receipts or expenses on payments abroad - income from investments and wages, current transfers. Investment income consists of dividends and profits from participation in the authorized capital, interest on deposits and securities, interest on loans attracted by government bodies and the banking sector. The balance of current transfers reflects the amount of humanitarian assistance received and provided, contributions and payments to and from international organizations.
Net investment income is the excess of interest and dividend payments made by foreigners on capital invested by residents abroad over the corresponding payments paid in the country to foreign investors. Thus, the size of the balance under this article depends on the total amount of exported capital and investments of foreigners.
If we sum up all operations on the current account, we get the current balance of payments of foreign trade operations. Its positive balance means that current account imports have created demand for less than what the export sector of the economy could supply.
The capital and financial instruments account reflects monetary transactions related to the purchase and sale of financial assets and the receipt of loans and borrowings. The capital account shows transfers received and paid related to migration and housing services. Operations with financial instruments are divided into direct and portfolio investments in the banking sector and non-financial enterprises, other investments: purchase and sale of foreign currency, trade lending, loans by government authorities, the banking sector and non-financial firms, overdue debt.
According to the time of placement of assets, short-term and long-term capital flows can be distinguished. The first direction includes current accounts of foreigners in a given country, as well as highly liquid assets belonging to them. The second is the purchase of securities of national companies and institutions, long-term loans, direct and portfolio investments. Capital inflows are indicated by a plus sign and indicate the acquisition of domestic financial assets by foreigners. It is identical to the inflow of foreign currency. Capital outflow is the process of acquisition of foreign assets by firms and households. It leads to the leakage of currency from the country. a surplus in the balance of capital movements occurs when capital inflows exceed capital outflows. This leads to an influx of currency.
The absolute figures for the capital account shown in a country's balance of payments are usually much smaller than the amounts attributable to current operations. This is explained by the fact that current account indicators are calculated on an accrual basis, and transactions related to the movement of capital are given in pure units. The volume of these operations is significant. A speculative influx of capital can have a strong impact on the exchange rate.
The third part of the balance of payments is the official reserve account. In accordance with the current balance of payments methodology, reserve assets are shown as a separate account in the analytical presentation and items in the capital and financial instruments account in the neutral direction. In any case, the economic significance of this article is different from all others.
Reserve assets include monetary gold, special drawing rights, reserve position in the IMF, and other foreign exchange assets.
The reserve assets account reflects transactions for the sale and purchase of foreign currency, gold and other assets carried out by the Central Bank and government agencies. The purpose of these operations is not to make a profit, but to settle imbalances in the balance of payments, to maintain the exchange rates of certain currencies, and for other purposes. At the expense of official reserves, the deficit or passive balance is covered by the two previous items of the balance of payments - the current account and the movement of capital. This happens through the sale by the Central Bank of accumulated reserves of reserve assets or the receipt by the state of foreign currency loans from other banks. A decrease in the reserves of the Central Bank leads to an increase in the supply of foreign currency on the market and is reflected in the balance sheet with a plus sign. a surplus on current and capital accounts leads to an increase in official foreign exchange reserves and is displayed in the balance sheet with a minus sign.
The total balance of the current account on foreign trade operations, movements of capital funds and settlements on the official reserve accounts of the Central Bank is always equal to zero. The difference between all registered inflows and outflows of funds forms a statistical discrepancy. It arises as a result of the fact that not all flows of funds are officially registered. The relatively high level of “errors and omissions” reflects the significant size of capital flight and unrecorded current account transactions (smuggling). Part of the statistical discrepancy is due to inaccuracies and errors in the original datasets.
In real life, economists and politicians often talk about the fact that the balance of payments is associated with a positive or negative balance. This result refers to the balance of two accounts: current account and capital flow. It shows the direction of movement of the currency (into or out of the country) from the conduct of international trade and financial transactions. If the balance of payments is in deficit, then the country received less foreign currency than it spent. The size of the deficit is equal to the reduction in official reserves. A surplus means that the government earned more currency than it spent, resulting in an increase in foreign exchange reserves.
Types of economic transactions.
The main types of actions of economic entities that can be found in the balance sheet are not payments, despite the name of the balance sheet, but economic transactions or transactions that may not be accompanied by a cash payment at all. Accounting for such transactions in the system of the balance of payments is its main difference from the balance of international payments of the country. The IMF distinguishes the following types of economic transactions that are reflected in the balance of payments:
1) Exchange. Such transactions usually make up the majority of transactions recorded in the balance of payments. An exchange transaction consists in the provision of economic value by one counterparty to another in exchange for an equivalent value in another form. At the same time, economic value is defined in a broad sense as real resources (goods, services, income) or instruments of money, currency and financial markets.
2) Transfers. They differ from exchange transactions in that the counterparty does not provide its equivalent in return for the value received.
3) Migration. Migration occurs when a household moves for an extended period of time to another country. This phenomenon is important for the balance of payments due to the fact that some types of assets are also moving along with the household, which, as it were, are imported into the country where the economic entity moves.
4) "imputed" operations. In some cases, the balance of payments may take into account the so-called "imputed" economic transactions that are not accompanied by a movement of value from a resident to a non-resident and vice versa. An example is the reinvestment of profits earned by a foreign shareholder of an enterprise.
In conclusion, considering the basic principles of compiling the balance of payments, it is necessary to dwell on the monetary units in which to keep records. From the point of view of the IMF, the standard unit of account should be stable enough so that changes in its exchange rate during the accounting period are not reflected in the totals, and the unit of account should also be stable over as many accounting periods as possible to ensure comparability and analysis of their dynamics. Thus, there is no ideal unit of account, and in order to report to the IMF, countries are required to draw up a balance of payments in those units that are approved in the country for this purpose. But it should be noted that in most countries accounting and publication of balance of payments indicators is carried out in US currency.
Thus, at present, most countries of the world compile their balance of payments in accordance with the methodology and principles developed by the IMF. this approach greatly facilitates the comparison and analysis of the balance of payments of different countries for different periods of time, and also allows you to unify the process of compiling the balance of payments.
3. Disproportions in the balance of payments and the reasons for their appearance.
The three main sections of the balance of payments, as noted earlier, are the following: current operations, capital movements and official reserves. The sum of current account balances and capital flows gives the balance of official reserves.
Due to the fact that the balance of payments is built on the principle of double counting, it is always in balance. This is not to say that current account balances and capital flows cannot run deficits.
The presence of a positive or negative balance indicates certain imbalances in the balance of payments.
With a certain degree of conventionality, they can be divided into 4 groups: price changes; structural imbalances; change in income level; autonomous movement of significant masses of capital.
Changes in prices, price disproportions are mostly associated with an increase in inflationary costs, an increase in the cost of production factors (labor, capital, land).
The imbalance caused by structural imbalances in world production could lead to lower exports. The reason is that the structure of industrial production does not meet the needs of the world market. This is typical for developing countries when. for example, the competition of synthetic products replaces the production of natural raw materials, dooming the countries that produce these raw materials to a decrease in export earnings.
A common imbalance in external payments is a change in the level of income, the multidirectional national priorities of individual countries, when the country's leadership is trying to simultaneously solve internal and external problems.
The balance of payments in a number of cases "sacrifices" the policy of economic growth and employment expansion. an inflationary program that ensures the growth of production and employment will simultaneously lead to an increase in imbalances in the country's balance of payments.
Less often there is a situation associated with a negative balance of the autonomous movement of capital. For example, when large war reparations are paid or expenses are made for the maintenance of military bases abroad.
Traditionally, all countries strive to ensure a positive balance, reflecting a mercantilist approach to assessing a positive balance as a means of accumulating valuables, primarily gold. In essence, a positive balance of payments means the delivery of more goods outside the national borders than the receipt, while in return, monetary obligations in foreign currency accumulate.
Here it is necessary to reasonably determine the amount of foreign obligations that a country will need to urgently stabilize its position in the event of natural disasters, temporary crop failures, production declines, etc. This situation can be compared with the situation when a student receiving a small scholarship of several tens of rubles is malnourished, and even gives half of his funds to an insurance company to receive a million insurance premium in an emergency.
Such phenomena become especially undesirable when the currency accumulated in the near abroad, for example, the Russian ruble, depreciates due to the inflationary policy of the government. Russia is constantly lending to its neighbors, receiving depreciating financial obligations in return.
The undesirability of maintaining foreign exchange surpluses for a long time prompted a number of countries to switch to a program of spending excess accumulated funds.
A negative balance of payments is, by definition, perceived negatively. The immediate consequence of the situation when the country "lives on credit" are such phenomena as the total debt, the lack of the required insurance reserve of foreign currency, the depreciation of the national currency, the general decline in living standards.
In most cases, a deficit means that a country imports more goods and services than it exports, paying for it with financial obligations, like a negligent owner living on debt.
As a rule, national governments, having discovered a deficit, seek to eliminate it quickly, using all available means. In this regard, Russia's attempts to get rid of the deficit by attracting massive loans, in particular from the IMF, seem promising.
Recently, the regulation of the balance of payments has lost its importance as a priority task for Western governments. A number of circumstances contributed to this.
First, the introduction of floating exchange rates ensured the "smoothing" of the emerging disproportions in international payments. In a highly internationalized economy, leaders of all countries prefer to hold large sums of money in all major currencies. The notion that the dollar is the preferred currency over other means of payment is gradually fading into the past.
Secondly, the distribution of the monetarist concept of the balance of payments, according to which the state can deliberately increase short-term liabilities with a view to their further use as monetary assets, had an equally significant impact. Thus, the increase in official assets in the form of US claims is largely the result of the desire of foreign governments to increase their assets in dollars. One of the reasons was the increase in contract prices for oil, calculated in dollars.
Thus, a comprehensive assessment of the situation in each specific case is necessary in order to ascertain the reasons for changes in reserves and other monetary assets. It is very important to take into account all socio-political parameters. It is on the basis of such an analysis that the system of measures aimed at eliminating, limiting or maintaining the balance of payments deficit can be finally determined, depending on the solution of alternative tasks of ensuring economic growth, increasing employment, fighting inflation, etc.
4. Basic methods of regulating the balance of payments.
The balance of payments has long been one of the objects of state regulation. This is due to the following reasons.
First, balances of payments are inherently unbalanced, manifesting themselves in long and large deficits in some countries and excessive surpluses in others. Instability of the balance of international payments on the dynamics of the exchange rate, the migration of capital, the state of the economy. For example, by covering the current account deficit with the national currency, the United States contributed to the export of inflation to other countries, the creation of an excess of dollars in international circulation, which undermined the Bretton Woods system in the mid-1970s.
Secondly, after the abolition of the gold standard in the 30s. 20th century the spontaneous mechanism for equalizing the balance of payments through price regulation is weak. Therefore, the alignment of the balance of payments requires targeted government measures.
Thirdly, in the context of the internationalization of economic relations, the importance of the balance of payments in the system of state regulation of the economy has increased. The significance of its balancing is included in the circle of the main tasks of the economic policy of the state, along with ensuring the pace of economic growth, curbing inflation and unemployment.
The material basis for regulating the balance of payments is:
· state property, including official gold and foreign exchange reserves;
· an increase in the share (up to 40-50%) of the national income redistributed through the state budget;
· direct participation of the state in international economic relations as an exporter of the capital of the creditor, guarantor, borrower;
· regulation of foreign economic operations with the help of regulations and state control bodies.
State regulation of the balance of payments is a set of economic, including currency, financial, monetary and credit measures of the state aimed at the formation of the main items of the balance of payments, as well as covering the current balance. There is a diverse arsenal of methods for regulating the balance of payments, aimed either at stimulating exports or at restricting foreign economic operations, depending on the monetary and economic situation and the state of the country's international settlements.
Countries with a deficit balance of payments usually take the following measures to stimulate exports, curb the import of goods, attract foreign capital, and limit the export of capital:
1. deflationary policy. Such a policy aimed at reducing domestic demand includes limiting budgetary spending mainly for civilian purposes, freezing prices and wages. One of its most important tools are financial and monetary measures: reducing the budget deficit, changing the discount rate of the central bank (discount policy), credit restrictions, setting limits on the growth of the money supply. In an economic downturn, with a large army of unemployed and reserves of unused production capacity, the policy of deflation leads to a further decline in production and employment. It is associated with an attack on living standards and threatens to exacerbate social conflicts if compensatory measures are not taken.
2. Devaluation. The depreciation of the national currency is aimed at stimulating exports and supporting imports of goods. Devaluation stimulates the export of goods only if there is an export potential of competitive goods and services and a favorable situation on the world market.
Raising the cost of imports, devaluation can lead to an increase in the production costs of imported goods, an increase in prices in the country and the subsequent loss of the competitive advantages gained with its help in foreign markets. Therefore, although it may give a country temporary advantages, in many cases it does not eliminate the causes of the balance of payments deficit.
3. Currency restrictions. Blocking foreign exchange earnings of exporters, licensing the sale of foreign currency to importers, concentrating foreign exchange transactions in authorized banks are aimed at eliminating the balance of payments deficit by limiting the export of capital and stimulating its inflow, and curbing the import of goods.
4. Financial and monetary policy. To reduce the balance of payments deficit, budget subsidies to exporters, protectionist increases in import duties, the abolition of taxes on interest paid to foreign holders of securities in order to inflow capital into the country, and monetary policy are used.
5. Special measures of state influence on the balance of payments during the formation of its main items - the trade balance, "invisible" transactions, capital flows.
Trade balance. In modern conditions, state regulation covers not only the sphere of circulation, but also the production of export goods. Stimulation of exports at the stage of sale of goods is carried out by influencing prices (providing tax and credit benefits to exporters, changing the exchange rate, etc.). To create a long-term interest of exporters in the export of goods and the development of foreign markets, the state provides targeted export loans, insures them against economic and political risks, introduces a preferential regime for depreciation of fixed capital, and provides them with other financial and credit benefits in exchange for the obligation to carry out a certain export program.
In order to regulate payments and receipts on "invisible" operations of the balance of payments, the following measures are taken:
Restriction of the rate of export of currency by tourists of a given country;
· direct or indirect participation of the state in the creation of tourism infrastructure in order to attract foreign tourists;
· promotion of the construction of sea vessels at the expense of budgetary funds to reduce the cost of the item "transport";
· expansion of public spending on research and development in order to increase revenues from trade in patents, licenses, scientific and technical knowledge, etc.;
regulation of labor migration. In particular, restricting the entry of immigrants to reduce the remittances of foreign workers.
The regulation of the movement of capital is aimed, on the one hand, at encouraging the foreign economic expansion of national monopolies, and on the other hand, at balancing the balance of payments by stimulating the inflow of foreign and repatriation of national capital. This goal is subordinated to the activity of the state as an exporter of capital, creating favorable conditions for private foreign investment and export of goods. Government investment guarantees provide commercial and political risk insurance.
In search of sources of repayment of the balance of payments deficit, industrialized countries mobilize funds in the world capital market in the form of loans from banking consortiums and bond issues. In this regard, commercial banks (especially European banks) actively participate in covering the balance of payments deficit. The advantage of bank loans in comparison with loans from international monetary and financial organizations is their greater availability and non-conditionality of stabilization programs. However, bank loans are relatively expensive and difficult to access for countries with large external debt.
Temporary methods of covering the balance of payments deficit also include concessional loans received by the country through foreign aid.
The final method of balancing the balance of payments is the use of official foreign exchange reserves.
Under the conditions of partial demonetization, gold as a universal means of payment is used: firstly, in a limited amount and only lastly, when all other possibilities have been exhausted; secondly, in an indirect form by its preliminary sale on the world gold markets in exchange for national credit money, in which it is customary to conclude trade and credit agreements and carry out international settlements.
The main means of final balancing of the balance of payments are the reserves of convertible foreign currency.
Foreign aid in the form of subsidies and gifts also serves as the final means of repaying the balance of payments deficit. For example, in 1947, 75% of the total deficit in the balance of payments of Western European countries was covered by US aid at the cost of economic and political concessions. In modern conditions, the attraction of assistance is especially characteristic of most developing countries, whose balance of payments, as a rule, is in deficit.
With a surplus balance of payments, government regulation is aimed at eliminating an undesirable excessive surplus. To this end, the methods discussed above - financial, credit, currency and others, as well as the revaluation of currencies are used to expand imports and curb the export of goods, increase the export of capital (including loans and assistance to developing countries) and limit the import of capital. Compensatory regulation of the balance of payments is usually applied, based on a combination of two opposing sets of measures: restrictive (credit restrictions, including raising interest rates, curbing the growth of the money supply, imports of goods, etc.) and expansionist (stimulating the export of goods, services, capital movements, devaluation, etc.). The state regulates not only individual articles, but also the balance of payments.
The surplus balance of payments is used by the state to pay off (including early) the country's external debt, provide loans to foreign countries, increase official gold and foreign exchange reserves, and export capital in order to create a second economy abroad.
A new phenomenon was the interstate regulation of the balance of payments from the mid-70s. It arose as a result of the internationalization of economic relations and the insufficient effectiveness of national regulation. With the increasing role of external factors of reproduction, a long-term disequilibrium in the balance of payments increases the disproportions in the economies of individual countries and in the world economy. Therefore, the leading countries are developing methods of collective regulation of the balance of payments. The interstate means of regulating the balance of payments include: harmonization of the conditions for state crediting of exports; bilateral government loans, short-term mutual loans of central banks in national currencies under swap agreements; loans from international monetary and financial organizations, primarily the IMF.
World experience in regulating the balance of payments indicates the difficulties of simultaneously achieving external and internal equilibrium of the national economy. This reinforces two trends - partnership and disagreement - in the relationship of countries with an active and passive balance of payments.
A colony is a country or territory under the rule of a foreign state, deprived of political or economic independence and governed on the basis of a special regime. As of the beginning of 2003, Great Britain owned ten colonies, the USA six, the Netherlands two, and so on.
Specialization is the development of a particular production.
Currency intervention is the operations of the central bank in the foreign exchange markets for the purchase and sale of the national currency against the main leading currencies.
Hedging is the conclusion of a forward transaction to insure price or profit.
The Balance of Payments is the record of all international financial transactions made by residents of a country with the outside world. A country's balance of payments indicates whether the population earns and/or saves enough to pay for imports. Balance of payments statistics are mainly compiled on a quarterly basis.It includes:
1) ;
2) capital account;
3) financial account.
The current account covers transactions in goods and services (exports and imports), investment gains/losses and current transfers. The capital account and the financial account mainly consist of transactions in financial instruments. A current account surplus or deficit indicates either an outflow or an inflow of cash and is reflected in the capital account and the financial account.
The balance of payments is an economic record of all economic transactions in a country. This is an important macroeconomic indicator that helps the country's Reserve Bank evaluate past economic trends and formulate monetary policy.
Current Account + Capital Account = Financial Account
What is the balance of payments
The Balance of Payments reflects the monetary value of all transactions that have taken place between residents of one country and residents of other countries over a given period of time. Typically published quarterly or annually. The BOP includes all private and public sector transactions. In simple terms, money flowing into a country from abroad has a positive impact (credit), while funds flowing out of the economy have a negative impact (debit) on the overall balance of payments.
current account
The current account records funds spent on the purchase (import) of foreign products and received from the sale (export) of their goods to foreign buyers. constitutes the main part of the Current Account. The current account also includes receipts from income-generating assets, such as dividends received on shares and interest on other investments, as well as remittances made internationally.
Current account = (X - M) + Net income + Net transfers
X - the amount of exports in monetary terms
M - the amount of imports in monetary terms
Net income - income of citizens of the country received from abroad, minus expenses paid to foreign countries
Net transfers - transfers of funds from foreigners minus transfers of funds from the local population abroad
Trade balance (Balance Of Trade). The balance of trade is calculated as the difference between a country's exports and imports and makes up the bulk of the current account indicator.From the balance of trade, investments and expenditures made in other countries are subtracted, and the amount of foreign investment made in the domestic economy is added.
If a country's total exports exceed its total imports, it has a surplus. However, if a country's total exports are lower than their total imports, the country has a trade deficit (negative balance). Countries like Germany and China have trade surpluses, while countries like the US, India and Australia have trade deficits.
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Example. In Russia, according to the results of the 1st half of 2017, exports reached $193.4 billion, and imports amounted to $146.5 billion, according to the report of the Central Bank of Russia. Thus, the trade balance of Russia in the 1st half of 2017 is equal to $46.9 billion Primary income such as wages, investment income, direct investment, portfolio investment amounted to minus $18.4 billion: Receivable = $22.1 billion Payable = $40.5 billion Total = – $18.4 billion Secondary income, which includes transfers between governments, social contributions and other current transfers: Receivable = $4.7 billion Payable = $7.8 billion Total = – $3.1 billion So the current account is: $46.9 – $18.4 – $3.1 = $25.4 billion |
The presence of a trade deficit is not necessarily seen as a disadvantage, but only indicates the structure of the economy and its stage of development. When a country is in the expansive stage of development, the reserve bank of the nation will tend towards a deficit. Higher imports encourage international competition, which keeps domestic prices from hyperinflating. If a country is experiencing deflation, it will seek a trade surplus in order to increase its exports, create more jobs, and increase demand for its goods.
Capital account
The capital account reflects the net change in ownership of assets. It takes into account the purchase and sale of non-financial and non-productive assets necessary for production.
This indicator also includes transactions such as 1) the transfer of financial assets by residents who migrate to the country, 2) the purchase and sale of foreign assets by a domestic company, and 3) the purchase and sale of domestic assets by a foreign company.
financial account
This component covers transactions related to financial assets such as gold, currencies, derivatives, special drawing rights, stocks and bonds.
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Example. Data for the 1st half of 2017 in Russia: Direct investment = - $1.4 billion Portfolio investment = $3.7 billion Derivative financial instruments = $0.6 billion Other investments = $5.8 billion Reserve assets = $18.9 billion During this period, foreign investors have invested $1.4 billion more in the Russian economy than Russia has in enterprises abroad. At the same time, Russia spent the vast majority of the foreign currency it received on replenishing its reserves ($18.9 billion). Financial account = $27.6 billion |
The balance of payments should theoretically be reduced to zero
Theoretically, the country's balance of payments should be zero. The balance of the current account plus the capital account must equal the balance of the financial account. A deficit in the current account is balanced by a surplus in the capital account (or financial account).
If a country is experiencing a stage of active growth, large foreign corporations tend to gain access to the local market through investment. This scenario has a balancing effect: while foreign direct investment will increase the capital account balance, it will also increase competition among local businesses and ultimately make products and services cheaper. Low prices will have a negative impact on the current account of the country. Therefore, the net effect is zero.
