ECON310 Global Managerial Economics - Colorado Technical University
Discuss the importance of the balance of payments as an accounting measure.
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Importance of balance of payment as an accounting measure
The balance of payment is a recording of the transaction in relation to international trade and financial transactions of country executed by the residents of the country. The value of the balance of payment derives by subtracting imports of the country from exports. It measures the international transactions and also called a balance of international payments. It concludes all the receipts received by firms, government, and individual including both factor and transfer payment (Stern, 2017). The balance of payment consists of two accounts namely capital and current account. The current account includes and records the transactions in relation to goods, services, current transfer payment, and investment income. The capital account represents the net alteration in the title of foreign assets and financial instruments transactions.
The balance of payment utilize the concept of double entry system under which the receipts are recorded on credit side and payments on the debit side which makes the account of the balance of payment always zero as the sum of debt is equal to the sum of credit. The difference may occur due to a different source of data and variability in exchange rates. The negative balance of payment will imply an excess of import than exports and a positive balance of payment will indicate an excess of exports than import which is good for any country. In of exports by country, there is receivable of foreign currency and in the case of imports, there is payment of foreign exchange. The difference will result in deficit and surplus position of any country.
Hence, the balance of payment measures the foreign receipts and payments. The account of the balance of payment measures the influence of foreign transitions and trade at the level of national income of any nation with the development of national income of accounting (Sinn and Wollmershäuser, 2012). The negative balance of payment also indicates the country dependency on foreign countries and financial assistance such as from the International monetary institution. It evaluates the degree of solvency of nation at international level. There is an evaluation of currency whether devaluating or appreciating which cannot be easily seen from a selection of current account.
Discuss the current account and its components and the capital and financial accounts and their components.
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Current, capitaland financial account and its components
Financial account deals with money in relation to foreign reserves, bonds, real estate, stocks, and private investments. The financial account can also be said as government-owned assets such as rights on unusal drawings at international monetary fund and assets held by private sectors which are possessed in other countries. It also includes the local assets which are held by other countries or foreigners. The components of financial account includeforeign assets as domestic ownership and any foreign ownership held for domestic assets. If domestic ownership of foreign assets enhances then there is an increase in financial account and if domestic assets foreign ownership increases then there is a decrease in the financial account.
The current account has mainly four components including trade, net income,direct transfers and income on asset(Gibson and Thirlwall, 2016). Trade is the majorconstituent of the current account and is a transfer of goods and services from one nation to other. Net income is the income which is received by residents of the country from foreigners subtracting income paid to them. Direct transfers are the remittances which are passing from workers to their home country which also include foreign aid of government. Asset income is the increase and decrease in value of assets in and outside the domestic country such as securities, real estate, deposits of bank and government reserves.
Capital account has three components namely borrowings and lending from and to abroad, the investment made to and from abroad and alteration in foreign exchange reserves. The first component will include the borrowings made by the government or any private sector and are recorded on the positive side and lending abroad by the government or any other private sector are recorded as a negative item (Johnson, 2013). Investment by foreigners in the domestic country is recorded in positive side and investment made by residents in foreign countries isrecorded on the negative side. Foreign exchange reserves are considered to be financial assets for government and any withdrawal from the account isnoted on the credit side and any deposits to the account are logged on the debit side.
How important is the U.S. deficit in traded goods in regard to the balance of payments?
Importance of U.S. deficit in traded goods with regard to the balance of payment
In recent years, US is facing a trade deficit which means the country is purchasing more goods from outer countries and selling fewer goods to the world. In addition to goods and services, the assets can also be trade and such transactions are connected with the financial account. Now, US need to borrow from foreign countries in order to control its trade deficit (Fratzscher, 2012). There is an increase in the productivity of labour which has might increase the investment but decreased the savings and thus created a wider gap in the current account deficit. This can also be said that the deficit in traded goods could prove counterproductive. The huge deficits can also be due to foreign governments are willing to pay a huge sum to the US. But easy credit is becoming tough day by day which can make the US repay the amount. The trade deficit in the US is not a problem but can be a symptom to a problem as there is low savings attitude of people which is significant to preventing stoppage of money flow in the future (Obstfeld, 2012). Domestic investment of the country required to fall below of national saving. There are many other reasons such as bank policies and foreign assets held by residents.
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