Studving? RESEARCH TOOLS Economist.comsuRveYs Facts behind the figures Sep 18th 2003 From The Economist print edition Much ado about nothing Current account Private capital account Merchandise trade Direct investment Imports of goods Equity flows = Trade balance Long-term bank debt Tourism Basic balance Professional and other services Balance of payments Goods-and- services balance +Interest and other investment income +official reserve transactions Unilateral transfers Changes in foreign central banks' holdings of domestic currency Current-account balance hanges in domestic central banks'holding of foreign Sources:"World Trade and Payments, by Richard E Caves, Jeffrey A Frankel and Ronald W Jones: The Ecomomist a quick guide to the balance of payments JUST as a company's accounts can seem impenetrable to the layman, so a country's external accounts look intimidating at first sight. Like corporate accounts, they need decoding A country' s balance of payments gives a snapshot of all transactions with foreigners. It has two main parts. The current account measures mainly trade in goods and services(known as the trade balance). It also includes interest paid on foreign borrowing(or received on foreign investments), as well as unilateral transfers abroad such as official foreign aid and remittances by foreign workers The second part of the balance of payments is the capital account. It measures all asset transactions with foreigners. the private capital account is made up of private investments whether foreign direct investment, stocks, bonds or bank loans. All official transactions(such as the central bank building up reserves) are dubbed official reserve transactions The sum of the current account the private capital account and the official reserve transactions is always zero. Thus net capital inflows, whether private or official, imply a current-account
Facts behind the figures Sep 18th 2003 From The Economist print edition A quick guide to the balance of payments JUST as a company's accounts can seem impenetrable to the layman, so a country's external accounts look intimidating at first sight. Like corporate accounts, they need decoding. A country's balance of payments gives a snapshot of all transactions with foreigners. It has two main parts. The current account measures mainly trade in goods and services (known as the trade balance). It also includes interest paid on foreign borrowing (or received on foreign investments), as well as unilateral transfers abroad, such as official foreign aid and remittances by foreign workers. The second part of the balance of payments is the capital account. It measures all asset transactions with foreigners. The private capital account is made up of private investments, whether foreign direct investment, stocks, bonds or bank loans. All official transactions (such as the central bank building up reserves) are dubbed “official reserve transactions”. The sum of the current account, the private capital account and the official reserve transactions is always zero. Thus net capital inflows, whether private or official, imply a current-account
deficit. Net capital outflows, in contrast, mean the current account will be in surplus But what do these balances mean in economic terms? a country that runs a current-account deficit is spending more than it produces, making up the difference by borrowing from abroad Put another way the current account is the difference between how much a country saves and how much it invests A rising current-account deficit could imply rising investment or falling saving or both To reduce a current-account deficit a country must save more and/or invest less. Higher saving can come from the private sector(companies or households)or from the government through a smaller budget deficit. The current-account balance shows the pace at which debt is being incurred (or, for a surplus country the pace at which assets are being accumulated). The basic balance of payments(the current account plus long-term private capital inflows) gives a sense of how much a country is borrowing and how willing private investors are to fund that borrowing by providing long-term Copyright@ 2004 The Economist Newspaper and The Economist Group. All rights reserve
deficit. Net capital outflows, in contrast, mean the current account will be in surplus. But what do these balances mean in economic terms? A country that runs a current-account deficit is spending more than it produces, making up the difference by borrowing from abroad. Put another way, the current account is the difference between how much a country saves and how much it invests. A rising current-account deficit could imply rising investment or falling saving, or both. To reduce a current-account deficit, a country must save more and/or invest less. Higher saving can come from the private sector (companies or households) or from the government through a smaller budget deficit. The current-account balance shows the pace at which debt is being incurred (or, for a surplus country, the pace at which assets are being accumulated). The basic balance of payments (the current account plus long-term private capital inflows) gives a sense of how much a country is borrowing and how willing private investors are to fund that borrowing by providing long-term capital. Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved
