BALANCE OF PAYMENTS 2

BALANCE OF PAYMENTS 2

Running Head: BALANCE OF PAYMENTS 2

Balance of Payments

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Balance of Payments

The balance of payments infers to the record of all global trade and financial dealings made by a nation’s residents. It comprises of the financial account, current account, and capital account. The financial account explains the transition in global ownership of assets. The current account determines global trade, direct payments, and net income on investments. Lastly, the capital account is made of all other financial dealings that do not affect the economic output of a country. A nation’s balance of payment depicts whether it has enough finances to cater to its imports (Stein, 2008). It as well used to illustrate if the nation produces adequate economic yield to provide for its development. This paper seeks to give more in-depth insights into the meaning of balance of payments and how it has been integrated into the United States.

Importance of the Balance of Payments

The balance of payments is used as a national accounting measure that checks on the flow of products and services in and out of the economy at any given point. It is essential for a nation’s investors to scrutinize its economically vulnerable segment to make appropriate decisions before putting investments in any country’s funds. This will be essential in examining the risks through assessment and help in determining if a specific investment is worth the risks. For example, putting stakes in a sector whose financial scopes are almost collapsing may be highly risky and not worth it. The financial capacity of a country is determined by its ability to withstand global trade (Hellerstein & Tille, 2008). Thus, the balance of payments is to used to evaluate whether or not a nation’s export quantities can be used to take care of its imports. Professionals are usually put in place to assess whether a nation’s balance of payments has a surplus or a deficit. It is infrequent to find a balance in the assets and liabilities; therefore, most countries either have a surplus or a deficit. The balance of payments is also essential to the financial researchers as they can use it to outline the market significant uncertainties and expectations.

Current, Capital and Financial Accounts

The current account is used to evaluate a nation’s trade balance and the impacts of direct payments and net income. If the activities of individuals give adequate income and savings to sustain all their business activity, purchases, and infrastructure; the current account is declared to be in balance (Stern, 2017). On the other hand, the financial account is used to measure the foreign possession of domestic assets and the changes in the domestic ownership of foreign products. If there is more foreign ownership than domestic property, there will be a deficit in the financial account. This is an indicator that a nation is selling off its assets at a faster rate than its acquisition of foreign assets. Lastly, the capital account determines financial transactions that do not impact a nation’s income, savings, and production. For instance, it keeps records of international sales of trademarks, copyrights, and drilling rights. However, most capital account transactions happen intermittently.

Importance of the U.S deficit in Traded Goods in Regarded to the Balance of Payments

Primarily, the U. S trade deficit is not necessarily a bad indicator. It can result in a rise in the nation’s standards of living since its occupants will have a broader variety of products and services as well as gaining competitive advantage. A trade deficit may also decrease the risk of inflation because it leads to lesser prices. With time, a trade deficit can lead to further outsourcing of workers to other nations. In the US, the Bureau of Economic Analysis (BEA) assesses and defines and evaluates the trade deficit (Hellerstein & Tille, 2008). Typically, a country with a deficit in trade spends more on imports than on exports. This will be beneficial in the short run as a negative balance in trade hinders inflation.

References

Hellerstein, R., & Tille, C. (2008, June). The changing nature of the United States balance of payments. Current Issues in Economics and Finance, 14(4). Retrieved from https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci14-4.pdf

Stern, R., (2017). Balance of Payments: Theory and Economic Policy. Routledge.

Stein, H., (2008). Balance of payments. The Concise Encyclopedia of Economics. Retrieved from http://www.econlib.org/library/Enc/BalanceofPayments.html