Balance of payments

The balance of payments recorded for a given period in terms of value of all economic transactions between residents and nonresidents and provides information on the economic interdependence of an economy with foreign countries. As a resident, any person with a permanent residence in the reference country; Moreover, any business entity - it has branches or production units that are not separate companies - if they exert the majority of their economic activities in the country.

The transactions are shown in the balance of payments in the form of income and expenditure. In Germany, the German Federal Bank issues monthly balance of payments. It is based on a directive of the International Monetary Fund ( IMF) on the structure of the balance of payments.

• 2.1 Double-entry bookkeeping
• 2.2 Booking Examples
• 2.3 Ex -post compensation
• 2.4 Numerical Example

• 4.1 Good or bad company site
• 4.2 Partial imbalances
• 4.3 Structural view of the balance of payments

Structure of the balance of payments

The big difference to a record in a business sense is that the balance of payments flows and any sizes in stock. Is the change over a period of an item, and not the total balance is thus measured at a time. Another difference to the business account form is that the debit and credit side will be combined to form a column. However, the principle of double-entry bookkeeping is also found in the balance of payments its application: for every booking you must be a counter-entry.

The balance of payments as a whole is therefore always balanced. Mainly, these two bookings with private sector actors

• The value-based detection of a good ( current transactions )
• The collection of receivables and property rights (financial transactions ).

Thus, the value is clear that the overall balance must always be balanced, as in amount must match eg a delivered car and the payment, both positions are posted but in different sub-accounts. Surpluses or deficits can therefore only occur in sub-balances. A balance of payments in accordance with the guidelines of the IMF consists of the current account and the capital account and a " Remnants ":

ZB = LB KB asset transfer Closeouts

Current account

In the current account

• The external contribution the movement of goods ( trade balance )
• Services ( services account )

Combined, resulting in a certain period of time between an economy and abroad.

Together, these sub-balances result in the current account balance. Spoken in the media of a " balance of payments balance ", as is almost always the current account balance meant. This is positive if exports and imports ( plus net capital transfers to foreigners) exceed.

LB = net exports ( trade balance services balance ) transfer balance sheet balance of the acquisition and investment income

Balance of capital transfers (gift balance sheet)

In the official balance of payments of the Federal Bank also is part of the balance sheet account " transfer of assets ". In contrast to the current transfers of other sub-balances those gratuitous services are recognized here, the change is not directly the income or consumption of the participating countries (eg debt ) and only once.

Together with the current account balance is the balance of capital transfers to the fiscal balance between home and abroad. This finance balance corresponds to a statistical Remnants of the change in net foreign assets.

Capital account

In the financial account of any changes in assets and liabilities vis- are recorded. The two possible booking here export of capital (that is, increase in receivables or decrease in liabilities to foreign countries ) and capital import ( decrease in accounts receivable and an increase in liabilities to foreign countries ). Capital inflows can be found on the debit side and capital exports on the credit side. The difference between capital export and capital import is referred to as net capital exports. This can be positive ( import predominates ) or negative ( export predominates ) be. In the financial account as part of the balance of the balance of payments, it is thus the reverse of the current account, it is less than zero, if the capital outflows predominate, and greater than zero if the capital inflows outweigh.

The Federal Bank divides the capital account into four sub- balances:

• Direct investments include all investments of German companies in foreign companies and vice versa by more than ten percent,
• To securities include shares, mutual fund, pension value and other money market instruments,
• Another adverse balance form, financial derivatives, such as futures,
• The credit traffic is still divided into short-term and long-term credit transactions.

In addition, there are other investments and the balancing item of the statistically not attributable to capital movements.

KB = capital import - export of capital, KB < 0 = net capital export

Foreign exchange balance

The foreign exchange balance describes the change in the official (national) currency reserves of the Central Bank. The foreign exchange reserves comprise cash foreign exchange reserves of the Central Bank ( for the euro area means that receivables in foreign currency to non- euro area residents - mostly denominated in U.S. dollars), the gold reserve, the reserve position in the International Monetary Fund as well as all existing Special Drawing Rights.

The change of all other claims of the central bank is held not in the foreign exchange balance, but in the financial account. The liabilities of the Central Bank are also located in the capital account.

Since 1999, the central banks of the euro area can only be taken under the Rules of the ESCB have (European System of Central Banks ) about their currency reserves.

Remaining stock

In the balance of payments " Balance of unclassifiable transactions," this position is called. In common parlance, however, spoke of remaining stock.

These sub- account records all unclassifiable transactions. In her fictional book on transactions are recognized, which correspond to no offsetting entries due to inaccurate statistical detection. So it is a kind of balancing position, so debit and credit side are actually balanced.

The Remnants include transfers to foreign countries below the reporting limit, the so-called "suitcase transactions" and no further unallocated items.

Systematics of the balance of payments

Double-entry bookkeeping

The basic concept of double-entry bookkeeping in the balance of payments, as already mentioned above, relatively simple: Businesses and individuals have to pay for the services received ( goods, services ) from abroad and vice versa. Each service transaction attracts a financial transaction which will lead affects the performance and the capital balance.

A second major set of operations is a financial transaction that pulls another financial transaction after themselves. A limited only to the capital account transaction would be, for example, the purchase of shares and the payment thereof. Imbalances between current and capital balance can thus be caused only by current transactions.

Book Examples

To better understand the accounting system of the balance of payments, it is advisable to book several examples from the "normal" international trade:

A German company exported goods worth U.S. $ 500 in the United States. This case is recorded as exports of goods in the current account balance. The buyer transfers the amount in dollars from his bank to the German bank of the exporter. It therefore provides short-term claims against U.S. Bank. The German Bank credits the exporter the equivalent value in euros in his bank account well.

Balance of payments

However, this accounting classification only applies to billing ( invoice ) in the currency of the importing country, as in the example above. If invoiced in domestic currency, the offsetting entry is to be recorded as negative, short-term capital inflows. These opaque at first glance booking can be explained by the typical interdependence in the international banking system. The exporter and the importer will process payment transactions each at their local bank in your own country. Each of these banks has at partner banks abroad foreign currency accounts in the relevant currency. If the invoicing currency of the exporting country ( Euro ), the currency of the bank account of the importer is charged at the Bank of the exporter to repay the loans in euro. From the perspective of the exporting country ( Germany ), a negative ( short-term) capital import takes place, because its short-term foreign liabilities (currency deposits with foreign banks ) decrease. It is striking that here a negative value is posted. This is explained by the nature of values ​​as a composite sizes. The position of the export of capital is made up of loans to foreign countries minus loan repayment by foreign capital inflow and the size of lending from abroad minus loan repayment to foreign countries. If so outweighs the rear position, a negative value is posted.

Balance of payments

The balance of payments as a whole always remains balanced. It should be noted yet that in the German balance of payments all items are recorded in euros, even if invoiced in the currency of another country, such as in the example above. This basic system applies to all current transactions application. Is a German tourist 50 euros abroad, so this corresponds to an import of services. In the financial account thus increase the debt by 50 euros.

Balance of payments

The second major set of operations that is posted in the balance of payments, only applies to the capital account. Here follows a financial transaction another financial transaction. No goods or services so it traded. Since this type of transaction has no effect on the current account, they can cause an imbalance between the sub-accounts. The purchase of shares abroad belongs to this type of operation. Both transactions, the purchase ( transfer of ownership ) and the payment, are purely financial transactions, as well as acquisitions of companies or parts of companies. Direct investment are also a part of the capital account. The payment of these investments, whether through shares (securities account) of the acquiring company or the payment of the purchase price ( loan balance traffic ) only has an influence on the capital account. Especially the balance of the capital account has risen sharply due to the increasing integration of international financial markets in recent decades.

Finally, it should be noted that in the final balance of payments, the target items to be brought under change of sign on the credit side. The official balance of payments consists of only one column. A positive balance means that an excess of the credit items against the debit item exists.

Ex -post compensation

It has already been mentioned above that the balance of payments as a whole is due to the double-entry bookkeeping always balanced. However, this is only partly true: If we define, as it is balanced, the balance of payments as ex post oriented collection of external transactions. It is " ex post", so in retrospect, considered a listing of all transactions for the selected period. The balance of payments can also be used to perform an ex ante oriented view of external transactions. Care is taken when a transaction to an effective demand for, or offer leads of foreign currency units and will lead. It tries to determine the expected foreign currency requirements of an economy. However, both concepts book the same cash flows.

Numerical example

• Foreign trade balance: For 2004, the German Federal Bank, an export (FOB) from 731.5 billion euros and an import (cost, insurance, freight - CIF ) from 575.4 billion euros, so that a trade surplus of 156.1 billion euro remains.
• Services: For 2004, the German Federal Bank receipts from sales of services to foreign countries in the amount of 116.4 billion euros and expenditure for the purchase of services from abroad of 147.3 billion euros, so that a balance of service -31.0 billion euro arises. From the domestic so more goods were sold to foreign countries so from there bought in services it was vice versa.
• Acquisition and investment income: It flowed in 2004 as revenue income from abroad into the country in the amount of 106.9 billion euros, and in the opposite direction 106.8 billion euros, so that flowed 0.1 billion euros as net income from abroad.
• Net current transfers: It flowed from a net of such transfers 28, 4 billion euros, the balance sheet net current transfers is thus -28.4 billion euro.
• Current account: Thus we obtain for the current account as the sum of the balances listed so far a current account balance of 84.6 billion euro.
• Asset transfers and purchase / sale of intangible non-produced assets: On balance flowed 0.4 billion euros from abroad.
• Capital account Balance of direct investment: On balance ( direct investment from the domestic to the foreign net direct investment from abroad in Germany ) was directly invested abroad in the amount of 22.2 billion euros, so that this balance indicates a negative: -22.2 billion euro, it was more foreign direct investments than vice versa.
• Total of securities transactions and financial derivatives: On balance was more sold in the amount of 16.6 billion euros at the foreign bought as from abroad. It flowed to net from abroad 16.6 billion euros.
• Balance of other capital flows: On balance flowed to other countries, including in the form of long-term loans of monetary financial institutions (net) 3.8 billion euros and in the form of short-term loans of monetary financial institutions (net) 85.3 billion euros, a total of 107, 0 billion euros. Since this money went to other countries, has been awarded, for example, as a credit to other countries, this balance is less than zero: EUR -107.0 billion.

All these balances add up to a balance of payments of 0.0 billion euros. The partial balances of the balance of payments thus add up to zero.

Compensation of the main components

Through the principle of double-entry bookkeeping it comes to individual transactions mandatory for balancing. However, it can also show the overall economy, why the sub-accounts must balance. The following approach is indeed in accounting terms (in the logic of the balance of payments ) is not entirely accurate ( as each performance transaction attracts a financial transaction by itself ), but shows the general economic situation of the main components on.

In the current account, see especially imports and exports of goods and services reflected. In a balanced current account so as much is imported as exported. The revenues from the export finance so the imports. The same applies to the capital account. Does the current account but no balance of zero, but, for example a deficit, is exported to more than imported. That is, it has to be paid to the foreign country, as is paid from abroad to the domestic more. This additional capital needed to " settle the bills " can only come from abroad. The private sector agents in Germany will therefore need to borrow abroad in the amount of the current account deficit, or have already received, to meet its liabilities can. These loans appear in the financial account in the broader sense (ie excl. The foreign exchange balance ) mirror image of the current account and the balance of payments as a whole is balanced.

The same applies for the case of a current account surplus. As a prerequisite abroad must borrow domestically to pay for the goods can. The demands of the interior to foreign countries on the capital account thus grow. A net export of goods and services goes balances mechanically bound with a net outflow of capital resulting when one transfers etc. apart again.

This representation refers of course only to balance technical aspects. A causal relationship between capital and current account balance can not technically be produced. To this end, rather the economic context must be tried.

Macroeconomic implications

Good or bad company site

The facts that the foreign trade balance is largely offset by the capital account, is the background to the question of whether Germany is a good or a bad business location. In the former, the export surplus of goods and services is emphasized in the latter the export of capital surplus. Since both must be held balances mechanically the same time ( apart from the others is usually smaller balances), located here from an accounting standpoint before a kind of chicken-and- egg problem.

In the economic context, this causality may also be regarded as solved long ago. As already Böhm -Bawerk realized, " ruled the financial account of the balance of power ": The aggregate demand aggregated from consumption demand and investment demand, with investment demand can vary greatly, while consumer demand is relatively stable. Behind the investment demand are investment decisions, which in turn depend on the attractiveness of the location. Thus, the capital account balance reflects the sum of the investment decisions. Therefore, both gross and net investment is a function of the capital account. A negative capital account reflected at a given savings rate necessarily in a low investment rate down, with the corresponding implications for economic development. So finally it is understandable why countries with high positive net exports may stagnate, while economies with negative account balances may prosper. A general statement as to whether export surpluses are good for an economy or not, is therefore not possible.

Part imbalances

Few countries have permanently a balanced performance and capital account. Whether an imbalance of a country has short or long term positive or negative effects, however, is difficult to assess on the basis of the balance of payments. Here macroeconomic factors and the overall economic situation of a country play a major role, so that current account imbalances can only be assessed using any additional information.

Structural view of the balance of payments

From the previous considerations on current account imbalances are four basic types of countries can be recognized.

A nascent debtor country has a negative current account balance and a positive balance of the financial account. It imported goods and services, and - for the payment thereof - also capital. So at this stage debt will be built to import can - but not made any debt service (hence nascent debtor country ). If these capital imports only of short-term nature, the country is in a debt service problem because it ( by its relatively low exports) occupies not enough foreign exchange to pay interest and repay principal of the loans. Are capital inflows, however, long-term nature and are not imports from consumption, but from capital goods, there is (again, ceteris paribus) the prospect of being able to provide through future production and export increases debt service. In this case, the country would be a pure / mature debtor country. Current account deficits are reduced and it raises a first surpluses. Once the country can afford not only the interest but also the repayment of existing debt, it has developed into a mature debtor country, because now no new debt must be created to finance the (previously negative ) net exports and also liabilities are broken down.

A nascent creditor country has a current account surplus. This surplus of the current account are immediately go abroad again as capital exports. This country is built on international investment, if it is long-term capital exports. Only if the expectant debtor country is able to invest productively, this (and not just consumed ), there is a chance of pure / mature creditor country, through interest income ( principal payments ) to receive returns of capital. In this situation, the creditor country takes towards current account deficits, as these have been already funded in the past. Here the idea of ​​intertemporal consumption is again significantly.

Since this classification purely based on observations from the balance of payments of the countries, a statement about the economy as a whole can not be made. Although the types described above can also be found real in all countries, but other factors determine whether this state of balance of payments for the individual country has positive or negative effects. The differentiation, whether it is short-term or long-term Kapitalim or exports, can be read even directly from the capital account, but even to the mentioned question of whether a country imports consumer goods or capital goods, the balance of payments are alone no information. Here further macroeconomic indicators are needed.

The role of the Central Bank

With the previous considerations, the assumption of free movement of capital was made implicitly. A central bank as an intervening institution did not exist. In order to finance the current account deficit - if the receipts of exports are not sufficient to pay for the imports ( in foreign currency ) - has been assumed that a credit abroad ( capital imports ) was added. These foreign exchange deficit can be financed, this transaction appears in the financial account as offsetting entry (see above) to power transaction ( eg import of goods). The capital account deficits are financed entirely by ( private ) loans from abroad. This has, as already mentioned above, the impact on the exchange rate between the currencies of the countries concerned. With a capital account deficit, ie when capital imports, there is a downward pressure on the domestic currency and capital export an upward pressure compared to the currency of the trading partner. This - by the trade ( current account imbalances ) induced - to compensate for changes in exchange rates, or at least keep their impact on the local economy as much as possible, is one of the tasks of central banks.

A balance of the capital account can therefore be made by the central bank. As mentioned above, the foreign exchange balance, yes the only describes the change in the foreign reserves of the central bank, sometimes even counted in the capital account. So could - mathematically - a current account imbalance are compensated using the foreign exchange balance.

Each central bank holds (more or less) large foreign exchange holdings before. So a currency demand can also be satisfied by the central bank, as long as enough foreign exchange reserves. The central bank sold the currency to residents so that they can meet their obligations vis - so no loans have to be taken abroad, to obtain enough foreign exchange. In extreme cases, the entire current account deficit of the central bank is financed. The central bank reserves then go back to the level of the current account deficit. Similarly this can be done with a current account surplus. Here, the central bank buys on the existing surplus, and the currency reserves of the Central Bank increase.

Importantly, these considerations are especially in a system of fixed exchange rates. The major industrial countries had by the Second World War to 1973, a system of fixed exchange rates based on the Bretton Woods Agreement. Even today, especially many smaller countries have agreed among themselves partially fixed exchange rates or have their currencies to a reserve currency (such as $ or € ) bound, which means a fixed exchange rate for this currency in the inference. Often this was not exactly rate fixed, but flexible exchange rates to an upper and lower limit ( " dirty float " ) are in the central bank must then intervene to keep the exchange rate within these limits. As soon as the exchange rate of the home currency threatens eg due to current account imbalances, to move outside the specified range, the central bank intervenes.

However, the central bank can intervene only as long as it also has currency reserves in order to keep the market price by an additional offer or an additional demand within the defined limits.

The current account of a country is in a long-term unilateral imbalance, the central bank must sooner or later yield to market pressure and the domestic currency to depreciate or with the associated negative consequences that should be avoided. An increase, for example, domestic goods on the world market are more expensive and thus more difficult to sell, import cheapen also. Job losses could be the consequence. In a devaluation foreign products are more expensive and there is the risk of " imported " inflation. At the same time, however, reduce the cost of its own exports.

Only the " reaction " of the central bank has been described on the macroeconomic situation, the central bank can actively take through the mechanisms described above also affect the current account balance. Changes the Central Bank, the exchange rate can affect the future imports / exports and thus avoid an imbalance in the current account balance. With a devaluation occurs ( ceteris paribus ) an improvement in the current account, since exports are more in demand by the " cheapening " abroad. Conversely, the same applies for a revaluation.

What effects are as much to be expected, depends to a large extent on the macroeconomic picture of a country and it is very difficult to predict. Whether the central bank intervenes or not, was at least officially their autonomous decision left in Germany - influenced by the overall economic development. The same applies to the now competent European Central Bank. In a system of floating exchange rates, it depends on a variety of factors, whether the central bank is engaged or not.

The role of the IMF

In order to allow long-term central bank of a country intervention to compensate for cyclical fluctuations, fixed exchange rates of Bretton Woods, the International Monetary Fund ( IMF) was established with the introduction of the system. The main task was, and is, with balance of payments problems to help financially countries. All member countries had to pay into the Fund and could get loans granted in persistent imbalances in the balance of payments, longer term, to intervene in the exchange market. As has been noted, however after a short time, that not only may be cyclical but also structural problems that IMF loans are used for investment by the government to solve these structural problems (now the main task of the IMF). Connected are the credits of the IMF (now partially questionable ) are subject to economic policy of the receiving country. With these constraints and the loans granted balance of payments problems of individual countries should be resolved and so a balanced growth of international trade can be achieved.