Balance of Payments 4.5

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

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.

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)

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.

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

Remittances (2003– 2004) Remittances* (2007–2008) India$21.7 billion$60.0 billion China$21.3 billion$40.5 billion Philippines$16 billion$30.8 billion Mexico$18.1 billion$26.2 billion France$12 billion$13.75 billion Bangladesh$3.4 billion$8.9 billion Pakistan $3.9 billion$ 7.0 billion Morocco$6.7 billion Total world wide$401 billion (IFAD)$443 billion (World Bank)

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.

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.

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.

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.

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.

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.

Do some more research to answer the question A. Is a current account or capital account deficit or surplus a good or bad thing? B. How “big” does a country allow its current account of capital account deficit or surplus get before it should be worried? C. 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)