Balance of payments Author: Pavel Tolar

Balance of payments – general description Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. When all components of the balance of payments accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.

Basic analysis The two principal parts of the Balance Of Payments accounts are the current account and the capital account. Current account Capital account

Current account current account is one of the two primary components of the balance of payments, the other being capital account. It is the sum of the balance if trade (i.e., net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers. In the traditional accounting of balance of payments, the current account equals the change in net foreign assets. A current account deficit implies a paralleled reduction of the net foreign assets.

How to calculate the current account Goods - Being movable and physical in nature, goods are often traded by countries all over the world. Services - In econimics, a service is an intangible commodity. More specifically, services are an intangible equivalent of economic goods. Income - A credit of income happens when an individual or a company of domestic nationality receives money from an incorporate or individual with foreign identity. Current Transfers - Current transfers take place when a certain foreign country simply provides currency to another country with nothing received as a return. Typically, such transfers are done in the form of donations or official assistance.

A formula for calculating current accounts certain country's current account can be calculated by the following formula: When CA is the current account, X and M the export and import of goods and services respectively, NY the net income from abroad, and NCT the net current transfers.

Capital (financial) account In macroeconomics and international finance, the capital account (also known as financial account) is one of two primary components of the balance of payments. Whereas the current account reflects a nation's net income, the capital account reflects net change in national ownership of assets.

Parts of capital account Foreign direct investments Portfolio investments Other investments Reserve account

Foreign direct investments refers to long term capital investment such as the purchase or construction of machinery, buildings or even whole manufacturing plants. If foreigners are investing in a country, that is an inbound flow and counts as a surplus item on the capital account. If a nation's citizens are investing in foreign countries, that's an outbound flow that will count as a deficit. After the initial investment, any yearly profits not re-invested will flow in the opposite direction, but will be recorded in the current account rather than as capital

Portfolio investments refers to the purchase of shares and bonds. It's sometimes grouped together with "other" as short term investment. As with FDI, the income derived from these assets is recorded in the current account; the capital account entry will just be for any international buying or selling of the portfolio assets

Other investments includes capital flows into bank accounts or provided as loans. Large short term flows between accounts in different nations are commonly seen when the market is able to take advantage of fluctuations in interest rates and / or the exchange rate between currencies. Sometimes this category can include the reserve account

Reserve account The reserve account is operated by a nation's central bank to buy and sell foreign currencies; it can be a source of large capital flows to counteract those originating from the market. Inbound capital flows (from sales of the account's foreign currency), especially when combined with a current account surplus, can cause a rise in value of a nation's currency, while outbound flows can cause a fall in value (depreciation). If a government (or, if authorized to operate independently in this area, the central bank itself) doesn't consider the market-driven change to its currency value to be in the nation's best interests, it can intervene.

Balance of payments Czech Republic – Develepment

Topics for discussion What are the main accounts of balance of payments? Is the balance of payments of Czech republic in surplus or deficit?