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
capital,
Copyright? 2004 The Economist Newspaper and The Economist Group,All rights reserved,