Techniques for Calculating a Balance of Payment Deficit or Surplus

Complete Information

• The simplest way to calculate the balance of trade value is to add the current account and subtract the capital account. If you have both of these pieces of data then the calculation is straightforward. The current account is all of the real-time transactions that do not give rise to further liabilities such as exports, imports and cash transfers. The capital account includes loans, investments and the international operations of central banks. The equation is as follows:

  current account (minus) capital account = balance of payments

Capital Account

• If you only have the individual components for a capital account and you have the complete number for the current account, you can still easily calculate the balance of payments. First, add the foreign direct investment, which includes direct purchase by foreigners of stakes in domestic companies. Second, add portfolio investments, which includes shares of publicly listed stocks or bonds. Finally, add the reserve account actions which are operated by the country's central bank. These are actions by the government to purchase or sell large amounts of currency to affect is market value.

Current Account

• Similarly, if you only have the components of the current account and have the entire capital account you are still able to calculate the balance of payments. The current account includes several components. Firstly, there is the balance of trade which is all exports minus all imports. Next is to factor income which includes interest and dividends. Finally, there is net transfer payments which include foreign aid and remittances from family and friends. Each component, whether positive or negative, is summed to find the current account.

Balancing Item

• Economists also use a balancing item when the calculations do not add up properly. This occurs when different accounting methods are used for different components of the number. National statistics don't always correlate with one another, both within a country and among different nations. For this reason, a balancing item is added to the end of the equation:

  balance of payments = current account - capital account (+ or -) balancing item

  The net result should be zero for the balance of payments.