In Demand and supply plays an important

In the recent years one question had been asked very frequently, Does the current
account imbalances matter? And if yes, then what impacts do the imbalances have on the economy? Or how does a comparison
between a global size of IFM where financial flows are so huge that they
dominate the current account of an individual economy? I wanted to look for answers
to questions like these.

Well, in short Balance
of Payments imbalances have both Merits and Demerits. But analyzing these is not
easy as each country is different and application or effects of these merits/demerits
changes from country to country and from time to time. In other words, surpluses neither good nor deficits are bad. A deficit may indeed promote development.
But the conditions necessary for this are restrictive and often not fulfilled as
still, trade deficits imply that we are
living beyond our means and accumulating too much debt. The lesson from the recent past (The financial
crises) is thus that renewed excessive imbalances must ultimately be reduced or
avoided. As market Demand and supply plays an
important role here, economic policy responses required to change for each
individual case demanding its own correct strategy, each problem has its own
root causes.

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The same factors
as inflation, economic policies and productivity, government budget
surpluses/deficits, and growth and overall foreign exchange based transactions
also impact the exchange rate of a country that overall contributes to imbalances in the Balance of payments,
however, this data on gross international positions are prone to many stability
risks.

 

Organization of the research

The
present research paper is divided into five chapters. The first chapter
describes the problem, purpose, and
structure of this paper. In the second chapter,
the Balance of payment is introduced. The subchapters 2.1 summarizes the Balance
of Payment in general context. The subchapters 2.2 to 2.4 describes the 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 the importance and different types of balances of Current
account are explained in brief. In point
in subchapters 3.1 and 3.2, the Surplus and Deficit balance are highlighted
upon in detail. The point 3.3 and 3.4 provides a detailed analysis of cause and effect of the different balances and
its importance for the economy in a long and short run. Finally, Chapter 4
summarizes and presents the results of this research project.

Introduction to
Balance of Payments

The Balance of Payments is a Financial Statement
that methodically summarizes, all the economic transactions of an economy, for
a specific period, The given transactions are mostly between governments of the
different countries my and between
residents and non-residents1. The transactions include a
country’s individuals, companies and government bodies between other economies that
include individuals, companies, and government
bodies. These transactions consist of imports and exports of
goods, services, and capital, as well as
transfer payments such as foreign aid and remittances between these parties mentioned above.

 

Standard
Components of the Balance of Payments

The balance of Payments consists
of a current, capital and financial accounts. Besides covering goods
and services, Current Account also covers income and current transfers and negative
trade balance (or trade deficit) is shown in Current Account, which in case the
combined net effect of trade balance, income, and
current transfers is also negative, the same results as the Current Account Deficit. The deficit needs to be financed by external
borrowings and/or investments which are constituents of Financial Accounts2. The capital account records all of the external investment transactions
between a country and the rest of the world. It records capital transfers, Capital transfers are transactions that involve the
transfer of ownership of fixed assets; transfer of funds linked to, or
conditional upon and the acquisition and
disposal of nonfinancial and financial assets transactions
that result from both portfolio and direct investment3.

 

The Capital
Account Balance (CA)

The capital account covers all transactions that involve the receipt or payment of capital
transfers and the acquisition or
disposal of non-produced, non-financial assets.  The
capital account consists of two categories: capital transfers and acquisition.
Acquisition or disposal of non-produced, nonfinancial assets consist of transactions
related to tangible assets that play a
very important part for production of 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 vital role
in production of goods or practice of certain services (e.g., patents,
copyrights,

1
Balance
of payments manual: by IMF- Fifth Edition Page-6

2Balance
of payments manual: by IMF- Fifth Edition Page-37

 

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