In the resentyears one question had be asked very frequently, Does the current account imbalancesmatter? And if yes, then what impacts does the imbalances have in the economy? Orhow does comparison between a global size of IFM where financial flows are sohuge that they dominate the current account of an individual economy? On the contraryto a complete market view of the world, large current account imbalances, whilevery possibly warranted by fundamentals and welcome, can also signal elevatedmacroeconomic and financial stresses, as was arguably the case in themid-2000s. Furthermore, the increasingly big valuation changes in countries’net international investment positions, while potentially important in riskallocation, cannot be relied upon systematically to offset the changes innational wealth implied by the current account. The same factors that dictatecareful attention to global imbalances also imply, however, that data on grossinternational financial flows and positions are central to any assessment offinancial stability risks. The balance sheet mismatches of leveraged entitiesprovide the most direct indicators of potential instability, much more so thando global imbalances, though the imbalances may well be a symptom that deeperfinancial threats are gathering.Organization of the researchThepresent research paper is divided into five chapters.
The first chapterdescribes the problem, purpose and structure of this paper. In the secondchapter the Balance of payment is introduced. The subchapters 2.1 summarizesthe Balance of Payment in general context. The subchapters 2.
2 to 2.4 describesthe different sections of Balance of Payment including Capital account,Financial account and Current Account. And of Chapter 3 is the aim of this section is to demonstrate theimportance and different types of balances of Current account is explained inbrief. In point in subchapters 3.1 and 3.2, the Surplus and Deficit balance arehighlighted upon in detail. The point 3.3 and 3.
4 provides a detail analysis ofcause and effect of the different balances and it importance for the economy inlong and short run. Finally, Chapter 4 summarizes and presents the results ofthis research project.Introduction toBalance of PaymentsThe Balance of Payments is a Financial Statementthat methodically summarizes, all the economic transactions of an economy, fora specific period, The given transactions are mostly between governments of differenteconomy and between residents and non-residents1. The transactions include acountry’s individuals, companies and government bodies between other economies thatinclude individuals, companies and government bodies. These transactionsconsist of imports and exports of goods, services andcapital, as well as transfer payments such as foreign aid and remittancesbetween these parties mention above.StandardComponents of the Balance of PaymentsBalance of Payments consist of current,capital and financial accounts. Besides covering goods and services, CurrentAccount also covers income and current transfers and negative trade balance (ortrade deficit) is shown in Current Account, which in case the combined neteffect of trade balance, income and current transfers is also negative, the sameresults as the CurrentAccount Deficit.
The deficit needs to be financed by external borrowings and/orinvestments which are constituents of Financial Accounts2. The capital account records all of the external investment transactionsbetween a country and the rest of the world. It records capital transfers, Capital transfers are transactions that involve thetransfer of ownership of fixed assets; transfer of funds linked to, orconditional upon and the acquisition anddisposal of nonfinancial and financial assets transactionsthat result from both portfolio and direct investment3. The CapitalAccount Balance (CA)The capital accountcovers all transactions that involves the receipt or payment of capitaltransfers and the acquisition ordisposal of non-produced, non-financial assets. Thecapital account consists of two categories: capital transfers and acquisition.Acquisition or disposal of non-produced, nonfinancial assets consist of transactionsrelated to tangible assets that are play a very important part for productionof goods and services but are not actually produced (e.g.
, land and subsoil assets)and transactions related with non-produced, intangible assets pay a very vialrole in production of goods or practice of certain services (e.g., patents,copyrights, trademarks, franchises, etc.
and leases or other transferable contracts).However, in the case of resident/non-resident transactions in land (includingsubsoil assets), all acquisition or disposal is deemed to occur between residentand non-resident acquires a financial claim on a notional resident unit. Theonly exception concerns land purchased or sold by a foreign personal is whenthe purchase or sale involves a shift of the land from one economic territoryto another.
In such instances, a transaction in land between residents and non-residentsis recorded under acquisition or disposal of non-produced, nonfinancial assets. The FinancialAccount Balance (FA)The financial account records transactions in financial assets andliabilities between residents and non-residents. It shows how an economy’s externaltransactions are financed. Transactions recorded in the financial account areclassified by function (i.e. the purpose of the investment) into directinvestment, portfolio investment, financial derivatives, other investment andreserve assets. The financial account measures, changes in domesticownership of foreign assets and foreign ownership of domesticassets.
If foreign ownership increases more than domestic ownership does, itcreates a deficit in the financial account. This means the country is sellingoff its assets, like gold, commodities and corporate stocks, faster than it isacquiring foreign assets. Current AccountBalance (CA)The current account consistsof all economic transactions (other than those in financial assets and liabilities),that occurs between resident and non-resident entities or between government ofdifferent economy.
It also includes offsets to current economic values providedor acquired without something of economic value in exchange. Thereare four major components to the current account, i.e. goods; services; income such as investment income (compensation ofemployees those involving transactions of realresources) and current transfers like remittances, grants etc.(those that are offsets to transactions provided or acquiredwithout a quid pro quo).4.1Balanceof payments manual: by IMF- Fifth Edition Page-62Balanceof payments manual: by IMF- Fifth Edition Page-37 4Balanceof payments manual: by IMF- Fifth Edition Page-51 to 53