Balance of Payments

Balance of Payments

A summary of all transactions between the people of one country and the rest of the world.

Current Account

Records a country’s transactions concerning goods, services, income, and current transfers.

Positive Current Account (A+)

Components include exports of goods, exports of services, income transfers, and current transfers.

Negative Current Account (B-)

Components include imports of goods, imports of services, income transfers back to foreign countries, and current transfers to foreigners.

Surplus

Occurs when A > B in the current account.

Deficit

Occurs when B > A in the current account.

Financial Account

Records transactions involving the ownership of financial assets and liabilities across borders.

Positive Capital Account (C+)

Includes investment by foreigners in domestic assets, foreign direct investments (FDI), and changes in official reserves.

Negative Capital Account (D-)

Includes investment by domestic entities in foreign assets and changes in official reserves.

If A > B, then _

There is a current account surplus.

If B > A, then _

There is a current account deficit.

If C > D, then _

There is a financial account surplus.

If D > C, then _

There is a financial account deficit.

Current Account Importance

Crucial for assessing a country’s economic health and sustainability of its trade and investment relationships.

Foreign Direct Investments (FDI)

When a foreign firm invests in at least 10% of a domestic firm or builds factories in the domestic industry.

Portfolio Investment

Investment in stocks, government bonds, corporate bonds, real estate, or land.

Official Reserve Changes in Financial Account

A current account deficit leads to a decrease in official reserves.

Current Account + Financial Account = ___

0, representing balance.