Скачать или смотреть 88- Balance of payments and its Components | Current Account | Capital Account | Financial Account

In this lecture, we discuss the Balance of payments and its components.


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The Balance of payments is a record of economic transactions between the residence of one country and the rest of the world.
It shows the flow of goods, services, financial assets, and transfer payments.
Double entries of several individual accounts are maintained.
Major accounts of a balance of payments are the current account, this is the major account of the balance of payments.
the capital account, and financial account.
Current account Balance
A current account balance is a sum up of the merchandise trade balance, service trade balance, trade balance, income balance, and transfer balance.
It is the major account of the balance of payments, showing money flow against goods, services, income, and transfer payments.
what is the Merchandise trade balance?
It shows the flow of visible items means goods.
When the value of the export of goods exceeds the value of import of goods, the merchandise trade balance is said to be in surplus.
And in another case, when the import value of goods exceeds the value of export goods, the merchandise trade balance is said to be in deficit.
Service Trade Balance, is also a component of the current account balance.
It shows the flow of invisible items means services include transport, consultancy, tourism, etc.
The Service trade balance like the merchandise trade balance could be in deficit or in surplus.
When the value of the export of services exceeds the value of import of services, the service trade balance is held in surplus.

And in another case, when the amount of inflow of services is higher than the value of outflow of services, the service trade balance remains in deficit.

What is the Income Balance?
It shows the net factor income earned from abroad.
It means income earned by the domestic people from abroad firms, foreigners, or investments made abroad minus the income earned by foreigners in the domestic economy.

When income earned by domestic people is greater than income earned by foreigners in the domestic economy, the surplus income balance is recorded.
If income earned by the foreigners in the domestic economy exceeds the income earned by domestic people from abroad, the income balance is said to be in deficit.
Transfer Balance
The transfer balance account is said to be in deficit when the gifts and aids to foreign country outflow are more than inflow of foreign gifts and aids to the domestic economy and vice-versa.
It means the current account balance includes all transactions involved in currently produced goods, services, plus net income, and the net transfer payments.
The capital account balance consists of two main items that are capital transfers and net acquisition or disposal of assets.
Capital Transfer Balance shows the debt forgiveness means the amount of financial liability that has been canceled by the creditor and the migrants transfer net wealth.
Net acquisition or disposal of assets
This portion of the capital account shows the flow of non-produced goods or non-financial assets like copyright, patents, franchise income, etc.
The capital account balance is sum up of net capital transfer balance and the net acquisition of assets balance.
Othe major account of the balance of payments is the financial account.
The financial account balance consists of direct investments, portfolio investments, other investments, and reserve assets.
what is Direct Investment?
The direct investment is the Foreigner Purchase of at least 10 % share in the domestic enterprises or companies.
What are Portfolio Investments?
The portfolio investment means the foreign Purchase of domestic financial assets securities, government bonds, and treasury bills.
Other investments are the purchase of foreign currencies, shares, accounts receivable, and trade credits.
The Reserve asset account is the total of all reserves including euros, gold, and other major currencies like SDR special Drawing rights that shift among central banks to settle international transactions.
Net error and Omission Account
To make the balance of payment account balance the net error and omission account is created to offset the excess of all other accounts by an equivalent debit in the error and omission account.

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