Ministry of Education and Science of Ukraine

State Education Institution

Pridneprovsk State Academy of Building and Architecture

Finance and marketing department

TERM PAPER

on «Finance»

Variant № 12

«Balance of payment»

Prepared by:

Student 587 group

Lastovina A.R.

Checked by:

Galushko O.I.

Mark:

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Dnipropetrovs’k

2012

Contents

Introduction

1. General concept of Balance of Payments

2. Essence of Balance of Payments

3. Imbalances

Conclusion

Bibliography

Introduction

In a world of increasing globalization, where political, economic and technological barriers are rapidly disappearing, the ability of a country to participate in global activity is an important indicator of its performance and competitiveness.

In order to remain competitive, modern day business relationships extend well beyond the traditional foreign exchange of goods and services, as witnessed by the increasing reliance of firms on mergers, partnerships, joint ventures, licensing agreements, and other forms of business cooperation. External trade may be complemented or substituted by producing (and often selling) goods and services in countries other than where an enterprise was first established: this approach is known as foreign direct investment (FDI), whereby the enterprise concerned either invests to establish a new plant/office, or alternatively, purchases existing assets of a foreign enterprise. FDI is a type of international investment where an entity that is resident in one economy (the direct investor) acquires a lasting interest (at least 10 % of the voting power) in an enterprise operating in another economy.

Conventional trade is less important for services than for goods and while trade in services has been growing, the share of services in total intra-EU trade has changed little during the last decade. However, FDI is expanding more rapidly for services than for goods, as FDI in services has increased at a more rapid pace than conventional trade in services. As a result, the share of services in total FDI flows and positions has increased substantially, with European services becoming increasingly international.

The balance of payments is a statistical statement that summarizes the transactions of an economy with the rest of the world. Transactions are organized in two different accounts, the current account and the capital and financial account, whose sum, in principle, should be zero, as for each credit transaction there is a corresponding one on the debit side. Thus, the current account balance determines the exposure of an economy vis-à-vis the rest of the world, whereas the capital and financial account explains how it is financed.

The balance of payments is also a statistical summary of international transactions. These transactions are defined as the transfer of ownership of something that has an economic value measurable in monetary terms from residents of one country to residents of another. The transfer may involve:

(1) goods, which consist of tangible and visible commodities or products,

(2) services, which consist of intangible commodities that are produced, transferred, and consumed at the same time,

(3) income (which is sometimes classified in “services”),

(4) financial claims on, and liabilities to, the rest of the world, including changes in a country’s reserve assets held by the central monetary authorities. Generally, a transaction is the exchange of one asset for another—or one asset for several assets— but it may also involve a gift, which is the provision by one party of something of economic value to another party without something of economic value being received in return.

International transactions are recorded in the balance of payments on the basis of the double-entry principle used in business accounting, in which each transaction

gives rise to two offsetting entries of equal value so that, in principle, the resulting credit and debit entries always balance. Transactions are generally valued at market prices and are, to the extent possible, recorded when a change of ownership occurs. Transactions in goods, services, and unilateral transfers constitute the current account, and transactions in financial assets and liabilities constitute the capital account.

The International Monetary Fund, which strives for international comparability, defines the balance of payments as “a statistical statement for a given period showing:

(1) transactions in goods, services, and income between an economy and the rest of the world,

(2) changes of ownership and other changes in that economy’s monetary gold, special drawing rights (SDR’s), and claims on and liabilities to the rest of the world,

(3) unrequited transfers and counterpart entries that are needed to balance, in the accounting sense, any entries for the foregoing transactions and changes which are not mutually offsetting”.