Balance of payments
AUTHOR: PAVEL TOLAR
Balance of payments – general description
 Balance of payments accounts are an accounting
record of all monetary transactions between a country
and the rest of the world. These transactions include
payments for the country's exports and imports
of goods, services, financial capital, and financial
transfers.
 When all components of the balance of payments
accounts are included they must sum to zero with no
overall surplus or deficit. For example, if a country is
importing more than it exports, its trade balance will be
in deficit, but the shortfall will have to be
counterbalanced in other ways – such as by funds earned
from its foreign investments, by running down central
bank reserves or by receiving loans from other countries.
Basic analysis
 The two principal parts of the Balance Of Payments
accounts are the current account and the capital
account.
 Current account
 Capital account
Current account
 current account is one of the two primary
components of the balance of payments, the other
being capital account. It is the sum of the balance if
trade (i.e., net earnings on exports minus payments
for imports), factor income (earnings on foreign
investments minus payments made to foreign
investors) and cash transfers.
 In the traditional accounting of balance of payments,
the current account equals the change in net foreign
assets. A current account deficit implies a paralleled
reduction of the net foreign assets.
How to calculate the current account
 Goods - Being movable and physical in nature, goods
are often traded by countries all over the world.
 Services - In econimics, a service is an intangible
commodity. More specifically, services are an intangible
equivalent of economic goods.
 Income - A credit of income happens when an
individual or a company of domestic nationality receives
money from an incorporate or individual with foreign
identity.
 Current Transfers - Current transfers take place when
a certain foreign country simply provides currency to
another country with nothing received as a return.
Typically, such transfers are done in the form of
donations or official assistance.
A formula for calculating current accounts
 certain country's current account can be calculated
by the following formula:
 When CA is the current account, X and M the export
and import of goods and services respectively, NY
the net income from abroad, and NCT the net
current transfers.
Capital (financial) account
 In macroeconomics and international finance,
the capital account (also known as financial account)
is one of two primary components of the balance of
payments. Whereas the current account reflects a
nation's net income, the capital account reflects net
change in national ownership of assets.
Parts of capital account
 Foreign direct investments
 Portfolio investments
 Other investments
 Reserve account
Foreign direct investments
 refers to long term capital investment such as the
purchase or construction of machinery, buildings or
even whole manufacturing plants. If foreigners are
investing in a country, that is an inbound flow and
counts as a surplus item on the capital account. If a
nation's citizens are investing in foreign countries,
that's an outbound flow that will count as a deficit.
After the initial investment, any yearly profits not reinvested will flow in the opposite direction, but will
be recorded in the current account rather than as
capital
Portfolio investments
 refers to the purchase of shares and bonds. It's
sometimes grouped together with "other" as short
term investment. As with FDI, the income derived
from these assets is recorded in the current account;
the capital account entry will just be for any
international buying or selling of the portfolio assets
Other investments
 includes capital flows into bank accounts or provided
as loans. Large short term flows between accounts in
different nations are commonly seen when the
market is able to take advantage of fluctuations in
interest rates and / or the exchange rate between
currencies. Sometimes this category can include
the reserve account
Reserve account
 The reserve account is operated by a nation's central
bank to buy and sell foreign currencies; it can be a source
of large capital flows to counteract those originating from
the market. Inbound capital flows (from sales of the
account's foreign currency), especially when combined
with a current account surplus, can cause a rise in value
of a nation's currency, while outbound flows can cause a
fall in value (depreciation). If a government (or, if
authorized to operate independently in this area, the
central bank itself) doesn't consider the market-driven
change to its currency value to be in the nation's best
interests, it can intervene.
Balance of payments Czech Republic –
Develepment
development
40,000.0
20,000.0
0.0
1992
-20,000.0
-40,000.0
-60,000.0
-80,000.0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Topics for discussion
 What are the main accounts of balance of payments?
 Is the balance of payments of Czech republic in
surplus or deficit?