Understanding Balance of Payments: Current, Capital, and Financial Accounts

Understanding the Balance of Payments

2.1 The Current Account includes transactions that generate income variations within a single economic year. It consists of four sub-balances:

• Trade Balance: Affects the sales and purchases of physical and tangible assets.
• Balance of Services: Affects the exchange of services, such as tourism, travel, freight, and insurance.
• Balance of Income: Includes intellectual property rights and investment income like dividends.
• Balance of Transfers: Includes income transfers from migrant remittances and grants.

2.2 The Capital Account Balance:

• Capital Transfers: Such as cohesion funds from the European Union.
• Purchase or Sale of Intangible Assets: Including copyrights and patents.

2.3 The Financial Account: Contains data on investment and changes in reserves. Investment can be direct or portfolio:

1. Direct Investment: Without seeking a takeover of companies, with a durable nature.
2. Portfolio Investments: Purchase of shares for short-term resale.

Capital inflows are recorded as a credit (positive), while outflows are recorded as a debit (negative).

2.4 The Balance on the Balance of Payments: A negative balance or deficit indicates a decrease in foreign reserves due to higher payments or financial outflows. A positive balance or surplus implies an increase in foreign reserves, due to higher fees or an increase in financial liabilities. Deficits are unsustainable when funding is insufficient to cover payments.

2.5 A Joint Vision for the Spanish Case:

1. Spain traditionally has a significant external deficit.
2. There is a chronic trade deficit due to energy and technological dependence.
3. The tourism sector generates a significant foreign input, funding 80-90% of the trade deficit.
4. The balance of income and transfers shows promising performance, including EU funds and Spanish investment abroad.