Balance of payments items are grouped according to the approximate scheme recommended by the IMF. Therefore, the balance of payments of any country looks approximately as follows:
Section A. Current operations (current account balance).
1 Goods (trade balance).
2 Services (balance of services).
3 Investment income (balance of interest payments).
4 Private one-way transfers.
5 State unilateral transfers.
6 Other services and income.
Section B. Direct investments and other long-term capital.
1 Direct investment.
2 Portfolio investments.
3 Other long-term capital.
Section C. Other short-term capital.
Section D. Errors and Omissions.
Section E. Compensating Items.
Section F. Emergency sources of covering (financing) balances.
Section G. Required Reserves of Foreign Authorities at the Central Bank.
Section H. Final Change in Reserves.
Each section (article) of the balance of payments indicates the movement of funds (receipts or payments) for each group of foreign economic transactions.
Section A:
1 The item “Goods” (trade balance) reflects the balance of payments for export, import and re-export transactions. Moreover, only payments actually made or immediately made under foreign transactions are included in the balance of payments.
The trade balance clearly reflects the role of foreign trade in achieving macroeconomic balance of the national economy, since it is based on the difference between merchandise exports and merchandise imports. A positive or negative trade balance largely determines the state of the balance of payments as a whole. For most countries, the equilibrium of the balance of payments depends largely on the equilibrium of the balance of trade.
2 The item “Services” (balance of services) includes receipts and payments for the country’s exports and imports of services on the world market. This includes services such as transport, financial, computer, communication services, construction, insurance and others provided by residents to non-residents and vice versa. The importance of the balance of services is increasing, especially in developed countries, due to the accelerated development of the non-manufacturing or service sectors in them.
3 The article “Income from investments” (balance of interest payments) shows the difference between payments for loans provided by the country and interest payments on loans received, as well as the ratio between income from exported and imported investments into the country.
Investment income includes:
– income from direct investment, i.e. income of a direct resident investor from the capital invested by him in a non-resident enterprise, and vice versa;
– income from portfolio investments, which are cash flows between residents and non-residents arising from the purchase and sale of securities;
– income from other investments, i.e. receipts and payments for any other financial claims of residents to non-residents, and vice versa.
If foreign capital invested in a given country generates less income than domestic capital invested abroad, then the net income from investment is positive, but otherwise it is negative.
4 The article “Private unilateral transfers” (transfers) reflects the intercountry transfer of material resources without a value equivalent. This includes current transfers from government and other sectors. The first reflect current transfers for international cooperation, various types of humanitarian assistance, etc. The second are transfers of funds between private individuals and non-governmental organizations (residents and non-residents), for example, transfers to relatives, wages to employees, alimony, etc.
The amount of private transfers depends on which of the counter flows of transfers turns out to be more intense: from the country or to the country.
5 The article “State unilateral transfers” includes paid and received subsidies, income (expenses) from the maintenance of military bases, embassies, consulates, representative offices (trade, military), etc.
6 The article “Other services and income” cannot be deciphered, since this most often includes the purchase and sale of weapons by a country, the financing of military-political actions, etc.
Sections B and C reflect the balance of capital flows, i.e. the ratio of import and export of public and private capital. Depending on the timing of movement, there are:
– long term operations(acquisition and construction of enterprises, purchase and sale of securities, receipt and provision of long-term loans and government loans, etc.). Such operations are carried out for a period of more than 2 years;
– short term operations(loans in cash and commodity form for up to 1 year, movement of funds through current accounts in foreign banks, import and export of capital, national currency and foreign currency values, etc.).
Section D groups articles that correct errors in statistical data from sections A, B, C, and also includes data on the volume of GDP and the size of central bank reserves.
The balance in sections A, B, C, D in some countries is regarded as the total balance of payments. The IMF also recommends including in the final balance sections E, F, G for greater reliability. They include reserve (compensating) items that characterize the sources and methods of repaying the balance of payments: the movement of gold and SDRs, the state of the country’s reserve position in the IMF, gold and foreign exchange reserves of the central bank, IMF loans, etc.
Section H shows the final state of the listed sources after compensation of the balance of payments.
A country's balance of payments can have both a positive and a negative balance: in the first case, it shows that more various assets have entered the country, and in the second, that their outflow from the country has exceeded the inflow. And this, in turn, can have both positive and negative consequences for the country’s economy. Thus, a constant negative current account balance leads to the depreciation of the national currency and encourages the attraction of foreign capital. At the same time, it is important for the economy in what form the influx will occur, since in this case special importance is attached to direct foreign investment.
An influx of long-term entrepreneurial investment can help revive the economy, although it will require further payment of income from them to foreign investors. Long-term public and private bank loans will increase the country's external debt,
and its maintenance will become more and more expensive over time.
A stable positive current account balance creates the basis for the export of capital and strengthens the position of the national currency. Negative consequences for the national economy can also cause sharp fluctuations in the current account balance - an increase in the negative balance destabilizes foreign economic transactions, as it provokes inflation and depreciation of the national currency.
In any case, the state of the balance of payments most clearly characterizes the general state of any national economy.
Conclusions:
1 Balance of payments is the ratio between payments received by a country from abroad and payments paid by the country abroad. The final balance of payments can be positive or negative, which reflects either the excess of the inflow over the outflow of payments into the country, or the excess of the outflow over the inflow of payments from the country.
2 Balance of payments consists of several sections that reflect the movement of assets for certain groups of foreign economic transactions.
Sections A, B, C are the main ones, as they reflect the international movement of real material assets. Sections E, F, G show reserve, compensating assets used to repay the negative balance of the balance of payments. Section H reflects the final state of the reserve sections after compensation of the balance.
In order to choose the right monetary, tax, and exchange rate policies, the official bodies of any country must have a good understanding of the mechanisms of interaction of macroeconomic indicators at the international level. It is necessary to monitor changes in international economic relations in order to identify emerging problems in a timely manner. Information for this is provided by the balance of payments.
The balance of payments is a systematic record of all economic transactions between the residents of a given country and the rest of the world over a specified period of time, usually a year.
An economic transaction is an act of exchange in which ownership of a good is transferred or a service is provided by a resident of one country to a resident of another. Any transaction has two sides - credit and debit.
From the point of view of a given country, the parties to the transaction are defined as follows: the movement of goods and services abroad,
Fundamentals of the theory of world economy 479
accompanied by a counter movement of money (export), and therefore an influx of capital from other countries, is a loan (money comes with a “plus” sign); the movement of goods and services from abroad, for which residents of the country must pay (import), therefore, the outflow of capital to other countries is a debit (cash is received with a minus sign).
The balance of payments consists of two flows: a) real resources - exports and imports of goods and services; b) the corresponding financial resources, which are payment for the acquisition or payment for the sale of financial resources.
To understand and analyze the balance of payments, it is necessary first of all to remember the basic principles of its construction:
Every international transaction is automatically recorded twice in the balance of payments: once as a credit and once as a debit. This principle of maintaining balance of payments accounts is fair because there are two sides to every transaction: if you buy something from a foreigner, you must pay him in one way or another, and this will definitely be reflected in your country's balance of payments. You can never be sure in advance where exactly the “loose end” of a given transaction will appear, but somewhere it will certainly appear;
The establishment of economic territory is important for the balance of payments. An economic territory is a geographical area under the jurisdiction of the government of a given country within which labor, goods and capital move freely. In addition to the territories defined by the state border, it includes: adjacent islands (if their economy is subject to the same monetary and fiscal authorities as the economy of the mainland); territorial waters within which the country has the exclusive right to fishing and mining; territorial enclaves located in other countries (for example, free economic zones);
The balance of payments reflects transactions carried out by residents of a given country. Residents are considered to be households or legal entities that have been in the country for more than a year and have their center of economic interest in it. They cannot include tourists, personnel of international organizations, personnel of foreign embassies, military personnel and their families, and foreign students. In contrast, foreign entrepreneurs and foreign workers are considered residents;
480 Section IV
4) only market prices are used for registration in the balance of payments, i.e. prices at which transactions are concluded between an independent buyer and an independent seller. These prices should be distinguished from stock exchange quotations, world market prices and any other general price indicators;
it is necessary that the time of registration of credit and debit entries coincide;
When preparing the balance of payments, a country must use the unit of account that it uses in internal settlements and accounting. For conversion into foreign currency, the national currency exchange rate that was actually in effect on the market on the date of compilation of the balance of payments is used.
Sources of information for compiling the balance of payments are:
customs statistics (transactions with goods registered by customs authorities);
monetary sector statistics (data on foreign assets and liabilities of central and commercial banks);
external debt statistics (data on stocks, flows and payments on public and private external debt of residents to non-residents, accumulated by the Ministry of Finance or the central bank);
statistical reviews (data on international trade in services, labor income, migrant remittances, information on direct and portfolio investments);
statistics of transactions with foreign currency.
Transactions between countries and the rest of the world are divided into two groups: current transactions and capital transactions. These groups are reflected in the balance of payments in the current account and capital account.
Transactions recorded in the current account are the sales and purchases of goods and services (balance of trade), as well as unilateral payments (transfers) made by one country to another without receiving a good or service in return (for example, remittances that a citizen one country, who went to work in another, sends family, or foreign aid).
The capital account records sales and purchases of assets, as well as borrowings and advances.
There is also an official reserve account. It reflects changes in the reserve assets of the government of a given country and foreign governments.
Fundamentals of the theory of world economy 481
A balance is maintained for each balance of payments account. If the absolute value of the credit is greater than the absolute value of the debit, then the balance will be positive; if, on the contrary, it will be negative. The trade balance is important. If export receipts exceed import costs, then the trade balance has a positive balance, otherwise it is negative.
There is a relationship between the balance of payments accounts. The current account and the capital account are reflections of each other. A current account deficit indicates that a country's exports of goods and services are not sufficient to pay for its imports of goods and services. How to finance this deficit? The country must either borrow from a foreign partner or give up ownership of some assets, which will be reflected in the capital account as a plus number.
Example. Let's assume that at some point in time your expenses will exceed your income. To finance the shortfall, you may be able to sell some of your assets (such as a stereo) or borrow money. A country does the same: to finance its current account deficit, it sells assets or takes on debt. This is what is expressed in the positive balance of the capital account.
In the opposite situation, when the country has a positive current account balance, i.e. its earnings from exports exceed its costs of imports, it can lend (not without benefit to itself) money to other countries, which means an outflow of capital and is expressed in a negative balance of the capital account.
As a result, the sum of the current account balance and the capital account must equal zero. However, in practice, most often countries' balances of payments have either a negative or a positive balance. A deficit means a net outflow of money from the country, and a surplus, or surplus, means a net inflow of money from abroad. In this regard, the question arises: is scarcity always bad and excess always good? There is no definite answer; it all depends on the specific circumstances.
Example. Japan had the world's largest current account surplus in mid-1990, its economy was growing at 5%, prices were rising at half the rate of other industrialized countries, but the yen was weakened and the stock market was in decline. . The problem was the state of the country's basic balance sheet. The surplus in the current account of the balance of payments was significantly offset by capital outflows. Britain was in the worst position of any industrialized country during the same period, with its current account deficit worsening.
482 Section IV
due to capital outflow, as a result of which the negative balance of payments amounted to 10% of GNP - this is the highest deficit balance in the group of industrialized countries. The US current account deficit was balanced by capital inflows, which did not solve the problem in the long term. Germany was in the best situation, it had a huge current account surplus compared to other countries (like Japan) and low capital outflow, so its balance of payments surplus was the largest in the world.
There are three main ways to eliminate a balance of payments surplus or deficit:
stop the flow of trade and capital;
correct internal economic imbalances;
force or permit to achieve a change in the exchange rate.
The system of balance of payments accounts is somewhat similar to a movie camera: both cannot show us what is going well and what is going wrong, they simply record what is happening, thereby helping to draw conclusions (in our case, regarding economic policy).
There are three situations in which the information contained in the balance of payments is especially necessary:
records of exchange results between countries make it easier to judge the stability of a system of floating exchange rates; the balance of payments helps to identify the accumulation of currency by people who are interested in owning it (residents of a given country's currency) and those who are inclined to get rid of this currency (foreigners);
in conditions of fixed exchange rates, the balance of payments helps to determine the amount of accumulated currency in the hands of foreigners in order to make a timely decision to support a fixed exchange rate if it is threatened by a crisis;
Balance of payments accounts provide information about accumulated debt, interest and principal payments, and the country's ability to earn foreign currency for future payments. This information allows you to estimate how difficult (or more expensive) it is for the debtor country to repay debts to foreign creditors.
The balance of payments of the Republic of Belarus is a statistical report that contains data on the country’s foreign economic operations for the reporting period in a systematic way. The balance of payments is compiled by the National Bank of the Republic of Belarus on a quarterly basis according to the methodology developed by the International Monetary Fund.
Fundamentals of the theory of world economy 483
The information basis of the balance of payments of the Republic of Belarus is reporting data on all foreign economic transactions of residents of the Republic of Belarus, provided by the Ministry of Statistics and Analysis, the Ministry of Finance, the Ministry of Internal Affairs, the State Customs Committee, the Belarusian Railway, the Belenergo, Belneftekhim concerns, the state enterprise " Beltransgaz”, as well as estimated data from the National Bank.
Currently, an analytical and standard presentation of the balance of payments is practiced.
The connection between the national economy and the rest of the world is carried out through two channels: trade in goods and services and trade in financial assets.
International trade in goods and services means that part of the goods produced in the country is exported to other countries and, on the other hand, part of the goods consumed and invested in the country is produced abroad (and imported). Similar relationships exist in the field of finance: the population of the country can purchase securities issued abroad and, conversely, foreigners can purchase our financial assets.
All transactions between residents of a given country and the rest of the world are recorded in the balance of payments.
Payment balance is a summary record of all economic transactions between a given country and other countries during the year. It characterizes the relationship between foreign exchange receipts into a country and payments that a given country makes to other countries (Table 19.1).
The balance of payments uses the principle of double entry, since any transaction has two sides - debit and credit. A debit reflects the influx of valuables (real and financial assets) into a country, for which the country must pay in foreign currency, so debit transactions are recorded with a minus sign. They increase the supply of national currency and create demand for foreign currency (these are import-like operations).
The loan reflects transactions that reflect the outflow of values (real and financial assets) from the country, for which foreigners must pay. Such transactions are reflected with a plus sign and are export-like. They create demand for national currency and increase the supply of foreign currency.
The balance of payments, according to the classification developed by the International Monetary Fund (IMF), includes two main accounts:
1) current account
2) capital account and financial instruments
1. Current account- reflects all transactions of a given country with other countries related to trade in goods, services and transfers. It includes:
a) export and import of goods. Exports of goods are reflected with a “+” sign, i.e. credit because it increases foreign exchange reserves. Import is written with a “-” sign, i.e. debit because it reduces foreign currency holdings.
The difference between export and import of goods is trade balance.
b) export and import of services, for example, international tourism;
c) net investment income, which is the difference between interest and dividends received by citizens of the country from foreign investments, and interest and dividends received by foreigners from investments in a given country;
d) net transfers, which include foreign aid, pensions, gifts, grants, and remittances.
The current account balance in macroeconomic models is reflected as net exports (Xn – net exports).
The current account balance can be either positive, which corresponds to a current account surplus, or negative, which corresponds to a current account deficit. If there is a deficit, it is financed either with the help of foreign loans or by selling financial assets, which is reflected in the second section of the balance of payments - the capital account.
2. Capital and financial account, which reflects all international transactions with assets. These are inflows and outflows of capital for long-term and short-term operations (sale and purchase of securities, purchase of real estate, direct investments, current accounts of foreigners in a given country, loans to and from foreigners, etc.).
The capital account balance (CF - capital flows) can be either positive (net inflow of capital into the country) or negative (net outflow of capital from the country).
The sum of the current account balance and the capital account balance is balance of official accounts.
Table 19.1 - Balance of payments structure
| Credit | Debit | |
| I. Current account | ||
| 1. Export of goods | 1. Import of goods | |
| Foreign trade balance | ||
| 2. Export of services | 2. Import of services | |
| 3. Income from investments abroad | 3. Payment of income to foreign investors | |
| 4. Net current transfers | ||
| Current account balance | ||
| II. Capital and financial account | ||
| 5. Net capital transfers | 4. Loans provided | |
| 6. Loans received | ||
| 7. Pure Errors and Omissions | ||
| Capital account balance | ||
| Balance of official accounts | ||
| Net change in official foreign exchange reserves | ||
A double-counting balance of payments is by definition zero, meaning that all of the country's debts must be paid. Therefore, the current account deficit must exactly correspond to the capital and financial account surplus. If residents of the country as a whole spend more on the purchase of foreign goods, services and assets than they receive from selling their goods, services and assets to foreigners, that is, if the balance of official accounts is reduced to a deficit, then the debt is repaid by the Central Bank by reducing official foreign reserves currencies.
Change in official reserves includes changes in the holdings of foreign currency, gold, and international means of payment, such as SDRs (special drawing rights). The SDR represents reserves in the form of accounts with the IMF (International Monetary Fund).
The purchase or sale by the Central Bank of foreign currency in exchange for national currency in private markets in order to influence the current macroeconomic situation is called currency intervention. When there is a balance of payments deficit as a result of central bank intervention, the supply of foreign currency in the domestic market increases, and the supply of the national currency decreases. This operation is export-like and is taken into account with a “+” sign, i.e. this is a loan.
If the balance of payments is positive, i.e. There is a surplus and there is an increase in official reserves at the central bank. This is reflected with a “-” sign, i.e. this is a debit (import-like transaction).
As a result of these operations, the balance of payments becomes equal to zero.
The balance of payments is the basis for developing the country's monetary, fiscal, exchange rate and foreign trade policies and managing public external debt.
19.2. Exchange rate
To ensure the implementation of trade and financial transactions between countries, a certain ratio is established between their national monetary units.
Exchange rate is the price of the national currency of one country expressed in the national currency of another country. (For example, £1 = $2).
The exchange rate is set depending on the ratio of demand for national currency and supply of national currency in the foreign exchange market. The formation of the exchange rate is graphically presented in Figure 19-1(a), where e is the dollar exchange rate, i.e. the price of 1 dollar expressed in rubles, D $ is the demand curve for dollars, S $ is the supply curve of dollars.
The demand curve for currency (for dollars) has a negative slope, since the higher the exchange rate of the dollar (the lower the rate of the national currency), i.e. The higher the price of a dollar in rubles, the more rubles we have to pay to get 1 dollar in exchange. Consequently, the smaller the demand for dollars will be.
Figure 19.1 – Formation of the exchange rate.
The dollar supply curve has a positive slope, since the higher the dollar exchange rate (the lower the national currency rate), the more competitive national goods are in foreign markets. Exports are growing, which leads to an influx of foreign currency and an increase in its supply in the market. The equilibrium exchange rate e 0 is established at the intersection point of the demand curve for dollars and the supply curve for dollars.
The demand for foreign currency is determined by:
1) the demand of a given country for goods produced in other countries, i.e. for imported goods
2) the demand of a given country for the financial assets of other countries, since in order to pay for the purchase by a given country of goods and financial assets of other countries, it must exchange its national currency for the national currency of the country from which it buys.
An increase in demand for currency (a shift to the right of the demand curve for dollars from D 1 to D 2 in Fig. 19.1. leads to an increase in its exchange rate (from e 1 to e 2) and a depreciation of the national currency.
The supply of foreign currency is determined by:
1) the demand of other countries for goods produced in this country,
2) the demand of other countries for financial assets (stocks and bonds) of a given country, since in order to pay for this purchase of goods and financial assets, foreign countries must exchange their currency (the dollar) for the currency of the country from which they are buying.
An increase in the supply of foreign currency shifts its supply curve from S 1 to S 2 to the right, reduces its exchange rate (from e 1 to e 2) and increases the rate of the national currency.
The exchange rate is influenced by such factors as: the state of the country's balance of payments; inflation rates; real interest rate; income dynamics in a given country and abroad; expectations of economic agents regarding future changes in the exchange rate; election campaigns, political stability, etc.
19.3 Exchange rate regimes
An exchange rate regime is a way for a government to regulate the exchange rate of its national currency. There are two exchange rate regimes: fixed and floating.
Fixed exchange rate – exchange rate set and supported by the central bank in a certain rigid ratio.
The main way to maintain a fixed exchange rate is through foreign exchange interventions by the central bank.
Central bank interventions- these are operations for the purchase and sale of foreign currency in exchange for national currency in order to maintain the exchange rate of the national currency at a constant level.
The balance of payments equation (BP – balance of payments) under the regime of fixed exchange rates has the form:
BP = Xn + CF – DR = 0 or BP = Xn + CF = DR (19.1)
where Xn is the current account balance,
СF – capital account balance,
DR – change in the value of foreign exchange reserves.
If the sum of the balance of the current account and the capital account is a positive value, i.e. If there is a surplus in the balance of payments, then foreign exchange reserves increase, and if there is a negative balance, which corresponds to a deficit in the balance of payments, then foreign exchange reserves decrease. The balance of payments is balanced by changing the value of foreign exchange reserves by the central bank, i.e. through central bank intervention(s).
With a chronic balance of payments deficit, there is a threat of complete depletion of official reserves.
With a chronic surplus in the balance of payments, there is a possibility of over-accumulation of official reserves, which is fraught with inflation.
A long-standing balance of payments deficit, resulting from the fact that a country has not taken measures to normalize the current account deficit for many years, depleting its official foreign exchange reserves, is called balance of payments crisis.
Fearing either inflation or depletion of foreign exchange reserves, the central bank is forced to officially change the exchange rate of the national currency and carry out revaluation or devaluation.
Revaluation - an official increase in the exchange rate of a national currency by the central bank under a fixed exchange rate regime.
Devaluation - official reduction of the exchange rate of a national currency by the central bank under a fixed exchange rate regime.
Floating (flexible) exchange rate - an exchange rate that is freely set on the market and changes under the influence of supply and demand for currencies.
Under a floating exchange rate regime, balancing of the balance of payments occurs without intervention (interventions) of the central bank and is carried out through the inflow or outflow of capital.
The balance of payments deficit is financed by capital inflows.
The balance of payments surplus is financed by capital outflows.
The balance of payments equation under the floating exchange rate regime has the form:
BP = Xn + CF = 0 or Xn = - CF (19.2)
A balance of payments surplus means that a country's goods and financial assets are in greater demand than foreign goods and financial assets. This increases the demand for the national currency and increases its exchange rate.
An increase in the exchange rate under a floating exchange rate regime is called appreciation of the currency. An appreciation of the currency makes national goods more expensive and imported goods cheaper. This favors the import of goods and the outflow of capital, since foreigners can receive less of the country's currency in exchange per unit of their currency. As a result, the balance of payments is automatically balanced.
A balance of payments deficit means that a country's goods and financial assets are in less demand than foreign goods and financial assets. This reduces the demand for the national currency and reduces its exchange rate. A decrease in the exchange rate under a floating exchange rate regime is called currency depreciation.
Currency depreciation makes national goods cheaper and favors the export of goods and capital inflows, since foreigners can receive more of a given country's currency in exchange for a unit of their currency. As a result, the balance of payments is automatically balanced.
If the central bank does not interfere in setting the exchange rate, then it is a “pure float” system. If the central bank intervenes, then this is a “dirty” or “managed float”. The current monetary system is a dirty float system because European central banks fear a collapse of the dollar, which would make American exports more competitive and reduce American demand for European and Japanese goods. This could lead to bankruptcies and business closures in other countries and increased unemployment.
19.4. Advantages and disadvantages of fixed and floating exchange rates Exchange rate regimes in Belarus
Each exchange rate regime has its own advantages and disadvantages.
Chapter 20. MACROECONOMIC PROBLEMS OF AN OPEN ECONOMY
Section V. OPEN ECONOMY
The balance of payments reflects the full range of a country's international trade and financial transactions with other countries and is a summary record of all economic transactions between a given country and other countries during the year. It characterizes the relationship between foreign exchange receipts into a country and payments that a given country makes to other countries.
The balance of payments uses the principle of double entry, since any transaction has two sides - debit and credit. A debit reflects the influx of values (real and financial assets) into a country, for which the country must pay in foreign currency, so debit transactions are recorded with a minus sign, since they increase the supply of national currency and create demand for foreign currency (these are import-like transactions). Transactions that reflect the outflow of values (real and financial assets) from the country, for which foreigners must pay, are reflected with a “plus” sign and are export-like. They create demand for national currency and increase the supply of foreign currency.
The balance of payments is the basis for developing the country's monetary, fiscal, exchange rate and foreign trade policies and managing public external debt.
The balance of payments includes three sections:
· current account, which reflects the sum of all operations for a given
countries with other countries involving trade in goods, services and transfers and therefore includes:
a) export and import of goods (visibles)
Exports of goods are reflected with a “+” sign, i.e. credit because it increases foreign exchange reserves. Import is written with a “-” sign, i.e. debit because it reduces foreign currency holdings. Exports and imports of goods represent the balance of trade.
b) export and import of services (invisibles), for example, international tourism. This section, however, excludes credit services.
c) net income from investments (otherwise called net factor income or net income from credit services), which is the difference between the interest and dividends received by citizens of a country from foreign investments, and the interest and dividends received by foreigners from investments in a given country.
d) net transfers, which include foreign aid, pensions, gifts, grants, remittances
Current account balance in macroeconomic models
reported as net exports:
Ex – Im = Xn = Y – (C + I + G)
where Ex is export, Im is import, Xn is net export, Y is the country’s GDP, and the sum of consumer spending, investment spending and government purchases (C + I + G) is called absorption and represents the part of GDP sold to domestic macroeconomic agents - households, firms and the state.
The current account balance can be either positive, which corresponds to a current account surplus, or negative, which corresponds to a current account deficit. If there is a deficit, it is financed either with the help of foreign loans or by selling financial assets, which is reflected in the second section of the balance of payments - the capital account.
· capital account, which reflects all international transactions with
assets, i.e. inflows and outflows of capital (capital inflows and outflows) both for long-term operations and short-term (sale and purchase of securities, purchase of real estate, direct investments, current accounts of foreigners in a given country, loans to and from foreigners, treasury bills, etc.) P.).
The capital account balance can be either positive (net
capital inflow into the country) and negative (net capital outflow from the country).
· official reserve account, including reserves of foreign currency, gold
and international means of payment, such as SDR (special drawing rights). SDRs (called paper gold) represent reserves in the form of accounts with the IMF (International Monetary Fund). In case of a balance of payments deficit, a country can take reserves from its account with the IMF, and in case of a surplus, it can increase its reserves in the IMF.
If the balance of payments is negative, i.e. there is a shortage
it should be funded. In this case, the central bank reduces official reserves, i.e. is happening intervention(intervention – intervention) of the central bank. Intervention is the purchase and sale by the central bank of foreign currency in exchange for national currency. When there is a balance of payments deficit as a result of central bank intervention, the supply of foreign currency in the domestic market increases, and the supply of the national currency decreases. This operation is export-like and is taken into account with a “+” sign, i.e. this is a loan. Since the amount of the national currency on the domestic market has decreased, its exchange rate rises, and this has a restraining effect on the economy.
If the balance of payments is positive, i.e. There is a surplus and there is an increase in official reserves at the central bank. This is reflected with a “-” sign, i.e. this is a debit (import-like transaction), since the supply of foreign currency in the domestic market is reduced, and the supply of domestic currency increases, therefore, its exchange rate falls, and this has a stimulating effect on the economy.
As a result of these operations, the balance of payments becomes equal to zero.
BP = Xn + CF – DR = 0 or BP = Xn + CF = DR
Operations with official reserves are used in a system of fixed exchange rates so that the exchange rate remains unchanged. If the exchange rate is floating, then the balance of payments deficit is compensated by the influx of capital into the country (and vice versa), and the balance of payments balance is equalized (without intervention, i.e., central bank interventions).
Let us prove this from the macroeconomic identity.
Y = C + I + G + Xn
Subtracting the value (C + G) from both sides of the identity, we obtain:
Y – C – G = C + I + G + Xn – (C + G)
On the left side of the equation we get the value of national savings, hence: S = I + Xn
or rearranging, we get: (I – S) + Xn = 0
The value (I – S) represents the excess of domestic investment over domestic savings and is nothing more than the capital account balance, and Xn is the current account balance. Let's rewrite the last equation:
Xn = S – I
This means that a positive current account balance corresponds to capital outflows (a negative capital account balance) because national savings exceed domestic investment, they are sent abroad, and the country acts as a creditor. If the current account balance is negative, then national savings are not enough to support domestic investment, so capital inflows from abroad are necessary, and the country becomes a borrower. If there is an influx of capital into the country, then the national currency becomes more expensive, and if there is an outflow of capital from the country, then the national currency becomes cheaper. Central bank intervention is not required under a floating exchange rate regime.
Payment balance is a statistical summary of economic transactions carried out between residents of a given country and the outside world over a specified period of time, usually a year.
The balance of payments (Table 6.2) is compiled according to the accounting principle of double entry of each economic transaction, which involves automatically recording each transaction in the balance of payments twice: once as a credit, and once as a debit, or vice versa.
Credit reflects an outflow of values, which should be followed by a counter cash flow from non-residents (export of goods, provision of services to non-residents, sale of securities to foreign citizens).
Debit reflects the influx of values for which residents of a given country must pay (import of goods, purchase of services by residents of a given country abroad, purchase of foreign securities by citizens, companies and the state of a given country).
The difference between the amount of payments to foreign entities and the amount received from them reflects Withbalance of payments balance . Positive, or balance of payments surplus, indicates that foreign currency receipts into the country exceed foreign currency payments. Shortage, or passive balance, means that foreign exchange payments to non-residents exceed foreign currency receipts into the country. The equality of foreign exchange receipts into the country and foreign exchange payments indicates an equilibrium state of the balance of payments with a zero balance.
In order to unify the methods for compiling the balance of payments and the uniformity of the content of indicators calculated on its basis, the Balance of Payments Manual is periodically published in different member countries of the International Monetary Fund (IMF). The Guide is currently in its 5th edition, adopted in 1993 and used by most countries in the world.
Table 6.2 Standard structure of the balance of payments
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I. Current account |
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1. Export of goods |
2. Import of goods |
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Trade balance (movement of goods) |
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3. Export of services |
4. Import of services |
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Balance of movement of goods and services |
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5. Current transfers from abroad |
6. Current transfers abroad |
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Current account balance |
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II. Capital and financial account |
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7. Net capital transfers from abroad |
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8. Getting loans |
9. Providing loans |
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10. Clean omissions and errors |
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Capital balance balance |
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Balance of payments |
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11. Net increase in official gold and currency reserves |
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All balance of payments items are divided into two groups depending on the economic nature of transactions:
1) current account, which reflects the intercountry movement of real material assets, including transactions with goods, services, income from foreign investments and current transfers;
2) capital and financial account, which shows the sources of financing for current operations and includes capital transfers, acquisitions or sales of non-financial assets, and transactions with ownership of financial assets and liabilities of a given government.
The most significant part of the balance of payments is the current account, which includes the trade balance, the balance of services, as well as net income and net current transfers. The largest part of the current account is trade balance, representing the ratio of the value of exports and imports of goods over a certain period of time. It allows you to analyze the country’s participation in the international division of labor, determine its place in international trade, and also illustrates the role of foreign trade in achieving macroeconomic equilibrium of the national economy. A positive or negative trade balance largely determines the corresponding nature of the balance not only of the current account of the balance of payments, but also the state of the balance of payments as a whole. For most countries, the balance of payments equilibrium rests on the balance of trade equilibrium.
The financing of the international movement of goods and services is reflected in the capital and financial account, which consists of a capital account, which reflects capital transfers, and a financial account, which reflects changes in the ownership relationships of a given country's foreign financial assets and liabilities.
If the capital account is positive ( CF > 0 ), then the country will turn out to be an importer (borrower) of capital. If the capital account is negative ( CF < 0 ), then the country exports capital and is a creditor.
The movement of capital is closely related to the movement of goods and services, reflected in the current account as the difference between exports ( X) and import ( M) goods and services: NX = X – M. It is assumed that if a country imports capital, then at the expense of this capital it expands the import of goods and services into the country. Such loans allow the country to import more goods and services than it exports, so net exports will be negative ( NX < 0 ).
Thus, being an importer of capital, the country is an importer of goods and services. On the world market, it acts as a debtor, which means that in the balance of payments there is a positive capital account balance and a current account deficit:
CF > 0 And NX < 0 .
And vice versa, if a country exports goods and services and net exports are positive ( NX >0 ), then the funds received will ensure that national savings exceed domestic investment. Excess savings can be used to lend to foreign partners. On the world stage, the country acts as a creditor. This means the opposite situation: a capital account deficit and a current account surplus:
CF < 0 And NX > 0 .
Consequently, the movement of capital and the movement of goods and services, firstly, are mutually opposite, therefore they are taken into account in the balance of payments with different signs, and secondly, ideally they balance each other:
CF = – NX,
that is, the capital account ( CF) must be equal to the current account ( NX) and the balance of payments must be zero.
The state, as a rule, pursues a policy of active regulation of the balance of payments, which is due to the need to conduct effective domestic economic policy and prevent interstate and international trade and financial crises.
When regulating the balance of payments, the state uses the following tools:
1) direct control over the import of capital, for which various kinds of restrictions and tightening measures are used in the field of customs policy, transfer abroad of income from foreign investments, etc. Such measures may have a short-term effect, but in the long term they will negatively affect the competitiveness of national enterprises and will also discourage foreign investors;
2) limiting inflation in order to reduce domestic demand by reducing the budget deficit, changing the discount rate, and setting limits on the growth of the money supply;
3) devaluation of the national currency in order to stimulate exports, but only if the country has export potential and if the situation on the world market is favorable;
4) regulation of the exchange rate. A depreciation in the exchange rate, other things being equal, stimulates exports and reduces imports;
5) manipulation of the discount rate.
Not only countries with a negative balance should regulate their balance of payments (Table
6.3), but also with a positive balance, since the uncontrolled growth of active
balance of payments creates problems with an overvalued exchange rate, slowdown in economic growth and unemployment, as demonstrated by the economic practice of Germany and Japan.
Table 6.3 Balance of payments of countries of the world for 2011, million US dollars
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Balance of payments |
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2. Saudi Arabia |
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3. Germany |
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196. France |
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197. Italy |
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198. United States of America |
Examples of solving typical problems
Problem 1
In 2010, the Japanese company supplied household appliances to Russia in the amount of 420 thousand yen. The company's profit in rubles amounted to 400 thousand rubles. Determine the cost of production in yen and the company's ruble revenue if the exchange rate was 10 yen = 32 rubles.
Solution:
To determine the cost of production in yen and ruble revenue of a Japanese company, it is necessary to determine the nominal exchange rate ( En) according to formula (6.1):
The nominal exchange rate in this case will reflect the “price” of the ruble expressed in yen. To determine the company's ruble revenue ( TRrub), you need revenue expressed in yen ( TR Y) divided by the nominal exchange rate. We get:
Product cost is calculated as the difference between total income (revenue) and profit ( P r). Let us determine the cost of production in rubles ( TCrub):
Let us determine the cost of production in yen ( TCyen):
Thus, the cost of production in yen amounted to 295 thousand yen, and the company’s ruble revenue was 1,344 thousand rubles.
Problem 2
The balance of payments is characterized by the following transactions:
· export of goods amounted to 70 million rubles;
· import of services – 45 million rubles;
· current transfers from abroad – 110 million rubles;
· repatriation of profits of foreign investors – 90 million rubles.
Determine the current account balance of the balance of payments.
Solution:
The current account balance of the balance of payments is the difference between the amount received from non-residents (credit) and the amount paid to non-residents.
The loan will cover two amounts: revenue from the export of goods for 70 million rubles. and current transfers from abroad in the amount of 110 million rubles, which in total amounts to 180 million rubles.
The debit will reflect two transactions: import of services - 45 million rubles. and repatriation of profits of foreign investors, that is, export of profits abroad - 90 million rubles, which is equal to 135 million rubles.
Consequently, the ratio between the inflow of currency from abroad and its outflow abroad will be:
180 – 135 = 45 million rubles.
Thus, the current account balance of the balance of payments will be 45 million rubles.
Self-control tasks
1. Establish a correspondence between the transaction and the part of the balance sheet (debit/credit) in which it will be reflected:
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Part of the balance |
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a) Export of goods |
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b) Purchase of foreign securities |
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c) Purchase of services by residents abroad |
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d) Sale of shares and bonds to non-residents |
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e) Repatriation of profits |
3. A country with high-tech technical equipment for production should specialize in production and export...
a) labor-intensive products;
b) capital-intensive products;
c) agricultural products.
d) This question cannot be answered based on the available information.
4. Protectionism as a foreign economic policy of the state is aimed at protecting competition...
a) domestic goods on the domestic market;
b) domestic goods on the foreign market;
c) imported goods on the domestic market;
d) domestic and imported goods on the world market.
5. Solving the fiscal problem for tariff methods of regulating foreign trade involves...
a) creating favorable conditions for domestic producers;
b) receiving additional income to the state budget;
c) development of contracts with foreign partners;
d) reduction in imports.
6. The exchange rate in most countries is currently determined depending on...
a) the state of social tension in various countries;
b) fluctuations in supply and demand on world currency markets;
c) rates set by the governments of leading countries;
d) degree of participation in world trade.
1. The difference in the values of nominal and real exchange rates is the result of the action...
a) foreign exchange markets;
b) currency speculators;
c) state monetary policy;
d) inflation.
2. The debit in the balance of payments reflects...
a) outflow of values from the country;
b) outflow of currency from the country;
c) influx of values into the country;
d) sale of securities to foreign citizens.
3. The country's economy is described by the following data:
· export of goods – 19,650 US dollars;
· import of goods – 21,758 US dollars;
· income of residents from foreign investments in the form of interest payments from abroad – USD 3,621;
· payments to foreign investors in the form of interest – USD 1,394;
· expenditures of the country's citizens on tourism – USD 19,191;
· the country’s income from tourism – USD 1,750;
· capital outflow from the country – USD 4,174;
· capital inflow into the country – USD 6,612.
Calculate the balance of the country's current account, financial account, and balance of payments.
4. At a dollar exchange rate of 0.7 euros, the American company sold goods worth 140 thousand euros to French buyers. Determine the exporter's foreign exchange profit when the dollar exchange rate increases to 0.75 euros.
5. A Japanese car costs 500 thousand yen, a car of the same class produced in the USA costs 10 thousand dollars. Determine the nominal and real exchange rates of the two currencies, provided that for one dollar you can get 100 Japanese yen.
6. In country A the expected inflation rate is 11%, and in country B it is 8%. The nominal interest rate in country A is 13%, and in country B it is 12%. Determine the direction of capital movement between countries and confirm with calculations.
Advanced tasks
1. Explain the differences between the short-term and long-term effects of the establishment of foreign trade relations on the distribution of income among owners of the factors of production used in the production of export and import-substituting products. Can we say that trade liberalization ultimately benefits everyone?
2. Explain why, with a fixed exchange rate, monetary policy within a country is ineffective. What role does the Central Bank’s sterilization of changes in foreign exchange reserves play in this?
3. A gold deposit has been discovered in the country. Miners with equipment come to the country to organize its extraction. What factors indicate that a current account asset will arise, and which indicate that a liability will arise? Will the balance of the financial account be active or passive?
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