Theory

Definition: Accounting document that provides a systematic record of economic transactions that occurred during a given period of time between residents of a country and residents of the rest of the world.

Accounting: double entry

Systematic: structured

Transactions:  Real and financial &  With or without compensation

Between residents and non-residents: Domestic

Time period – Flow variable (vs stock Internations Investmen Position)

Estructure 

·        Current Account (CC)

o   Goods (income X)

o   Services (income X)

o   Primary Income (factor income) Income (remuneration of domestic production factors abroad) and expenditures (remuneration of foreign production factors in the country):

•  Investment income

• Employee compensation

o   Secondary Income (current transfers) Accounting counterpart of real and/or financial movements, whether voluntary or obligatory, that do not imply a consideration in goods and/or services. (income: transfers received, expenses: transfers made)

• Workers' remittances

• Others

·        Capital account : Capital transfers and operations on non-produced non-financial assets

·        Financial Account (FA) Records all transactions related to the transfer of ownership of financial assets and liabilities of the economy to the rest of the world.

o   Direct investment (participation greater than 10%)

o   Portfolio investment (stocks)

o   Others (Deposits, commercial credits)

o   Reserve assets

·        Errors and omissions: This account should be interpreted as a balance or statistical discrepancy account that compensates the rest. A positive sign is interpreted as an unrecorded income and, in the opposite case, as an expense.

Balances

·        Trade balance

·        G&S Balance

·        The current account balance reflects what happens with the Savings-Investment relationship of an economy.

·        Liquid assets balance (reserves)

Net Lending/Borrowing Position (NLBP) = Current Account+Capital Account = Financial Account (including Reserves)−Errors and Omissions (E&O)

Interpretations:

1 C/C deficit ➡️ the sum of X-M + RPN + RSN is negative

RNBD = GDP + RPN + RSN = FC + GCF + X -M + RPN + RSN

RNBD = FC + Savings (Gross National Savings)

FC + Savings = FC + GCF + X -M + RPN + RSN ⏩ Savings - GCF = X -M + RPN + RSN ⏩ Savings - Investment = C/C balance

2 C/C deficit ➡️Expenditure (absorption) greater than disposable income

Absorption = FC+FBC = Domestic demand or Domestic expending

RNBD - Absorption = X -M + RPN + RSN = C/C balance

3 C/C deficit ➡️ Investment > Savings If savings are greater than investment there will be a surplus in C/C

• ➡️ Differences between public and private savings and investment 

4 C/C deficit ➡️ Net International Investment Position changes: Increase in the debtor position or  Decrease in creditor position.

The International Investment Position (IIP) is a financial metric that summarizes a country's external assets and liabilities at a given point in time. It reflects the net financial position of a country with the rest of the world, indicating whether it is a net creditor or a net debtor. 

Data

USA: U.S. Direct Investment Abroad: Balance of Payments and Direct Investment Position Data | U.S. Bureau of Economic Analysis (BEA)  / BEA Interactive Data Application 

UK: Balance of payments - Office for National Statistics 

Practice

Glossary

• CA - Current Account: Part of a country's balance of payments that tracks the trade of goods and services, income from abroad, and current transfers, reflecting the nation's net income.

  • Goods Balance (Exports Revenues X - Imports Payments M): The trade balance of goods, reflecting income from exported goods.

  • Services (Exports Revenues X - Imports Payments M): The balance of services, showing income from services provided abroad.

  • NPI: Net Primary Income (Factor Income): Records income and expenses related to the remuneration of production factors, including:

    • 1. Investment Income: Earnings from foreign investments, such as dividends, interest, and profits.

      2. Employee Compensation: Wages and salaries received by residents working abroad and paid to foreign workers in the country.

  • NSI - Net Secondary Income (Current Transfers): Accounting counterpart of real and/or financial movements that do not involve compensation in goods or services, either voluntary or mandatory. It includes:

    • 1. Workers' Remittances: Money sent by migrant workers to their home country.

      2. Other Transfers: Other types of current international transfers.

• KA - Capital Account: Records capital transfers and transactions involving non-produced, non-financial assets. It includes:

• Capital Transfers: International transactions that involve changes in ownership of fixed assets or debt forgiveness.

• Operations on Non-Produced, Non-Financial Assets: Includes sales or acquisitions of patents, copyrights, trademarks, and land used by embassies.

• FA - Financial Account: A component of a country's balance of payments that records transactions involving financial assets and liabilities with the rest of the world, including investments and loans. 

  • FDI - Foreing Direct Investment: Foreign investment involving ownership of at least 10% in a company.

  • Portfolio Investment: Investments in financial securities, such as stocks and bonds, that do not confer significant control over the company.

  • Other Investments: Includes commercial loans, deposits, and other financial assets that do not fall under direct or portfolio investment.

• Reserve Assets: Foreign currency reserves and other highly liquid assets held by central banks to manage exchange rate stability and financial crises.

• E&O - Errors and Omissions: It serves as a balancing or statistical discrepancy account.. A positive balance indicates unrecorded inflows, while a negative balance suggests unrecorded outflows.

• NLBP - Net Lending/Borrowing Position: Indicates whether an economy is a net lender (surplus) or net borrower (deficit) to the rest of the world, based on the balance of its financial transactions.

Exercise

Comment the balance of payment of one country.

Take a lock of the Current Account balance of a contry and see what happend with the International Invesment Position. Comment