International Finance - balance of payments

what is the balance of payments

It summarizes the international flows of goods and services and changes in the ownership of assets across countries

explain the different components of the balance of payments

I. Current account

• Trade balance account (exports, imports)

• Investment income account (income flows from asset investments)

• Unilateral transfers of money

II. Capital account (or financial account)

• Purchases / sales of foreign assets by domestic residents or of domestic assets by foreign residents

III. Official reserves account

• Purchase/sale of official international reserve assets by a nation’s central bank.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 0

→Any transaction resulting in a receipt of funds from foreigners is entered as a credit

→Any transaction resulting in a payment to foreigners is entered as a debit

what is a surplus

Surplus results when the credits exceed the debit transactions

what is a deficit

Deficit results when the debits exceed the credit transactions

how to calculate the current account

Current account = Trade account + Investment income account

what is the net international investment position

It is the difference - at a given point in time - between

• the value of a country’s ownership of foreign assets

• the value of the foreign ownership of domestic assets.

when a country is a net creditor

if the net international investment position is positive

when is a country a net debtor

if the net international investment position is negative

what does the gross domestic product (GDP) measure and give the formula

= the final value of all goods and services that are produced within a country in a given time period.

GDP = C + I + G + EX − IM

what does the Gross national product (or income) (GNP)

= is the value of all final goods and services produced by a nation’s factors of production in a given time period.

GNP = GDP + NFI

what is the net foreign income

NFI = payments from foreign countries for factors of production - payments to foreign countries for factors of production

what happens when a country exports more than it imports, it earns more income from exports than it spends on imports

net foreign wealth is increasing

what happens when a country exports less than it imports, it earns less income from exports than it spends on imports

net foreign wealth is decreasing