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International investment position and financial account of balance of payments

  • IIP: value of assets and liabilities (transactions plus valuation)

  • BOP-FA: value of transactions (when money changing hands)

  • Everything expressed in local currency units

Net IIP (stocks)

\[ \newcommand{\xnetf}{\mathit{netf}} \newcommand{\xrf}{\mathit{rf}} \newcommand{\xnetfh}{\mathit{netfh}} \newcommand{\xnetfg}{\mathit{netfg}} \newcommand{\xnetiip}{\mathit{netiip}} \newcommand{\xnetb}{\mathit{netb}} \newcommand{\xtrans}{\mathrm{trans}} \newcommand{\xpinc}{\mathrm{pinc}} \newcommand{\xval}{\mathrm{val}} \xnetiip_t \equiv \xnetf_t + \xnetb_t \]

  • Net fixed-income asset position \(\xnetf_t \equiv \xnetfh_t + \xnetfg_t\)

  • Net equity asset position \(\xnetb_t\) consists of corporate assets and corporate liabilities

Net fixed-income asset position

  • One-period fixed-income (debt) instrument recorded at orgination book value

  • Any change in the value of debt is a transaction (IIP and BOP)

\[ \xnetf_t - \xnetf_{t-1} \]

Equity assets and liabilities

\[ \xnetb_t^h = \sum_{a\ne h} \phi_{a,t}^h \ \frac{e_t^h}{e_t^a} \ pk_t^a \ k_t^a - \sum_{a\ne h} \phi_{h,t}^a \ pk_t^h \ k_t^h \]

  • A change in \(\xnetb_t\) is the results of new transactions and valuation (including depreciation, variations in exchange rates, and variations in equity prices)

  • Example

\[ \begin{gathered} e_t \ pk_t \ k_t - e_{t-1}\ pk_{t-1} \ k_{t-1} = \\[10pt] = e_t \ pk_t \ \left( k_t - k_{t-1} \right) + \left( e_t\ pk_t - e_{t-1} \ pk_{t-1} \right) \ k_{t-1} = \\[10pt] = \underbrace{e_t\ pk_t \ \left[ k_t - (1-\delta) k_{t-1} \right]}_{\text{Transactions}} \ \underbrace{-\ \delta\ e_t \ pk_t\ k_{t-1} + \left( e_t\ pk_t - e_{t-1}\ pk_{t-1} \right) \ k_{t-1}}_{\text{Valuation}} \\[10pt] \end{gathered} \]

  • Change in equity assets owing to transactions \(\xnetb_t^\xtrans\)

  • Change in equity assets owing to valuation \(\xnetb_t^\xval\)

Net primary income on equity

\[ \xnetb_t^{\xpinc, h} = \sum_{a\ne h} \phi_{a,t}^h \ \frac{e_t^h}{e_t^a} \ pu_t^a \ uk_t^a - \sum_{a\ne h} \phi_{h,t}^a \ pu_t^h \ uk_t^h \]

  • Rental price of capital services, \(pu_t\)

  • Capital services (capital times utilization), \(uk_t\)

Balance of payments (flows of transactions)

Description Formula
Financial account \(\Delta \xnetf_t + \xnetb^\xtrans_t = \cdots\)
Current account: Primary income \(=\ \xrf_t \cdot \xnetf_{t-1} + \xnetb_t^\xpinc \ \cdots\)
Current account: Trade balance \(+\ \mathit{pxx}_t \cdot xx_t - pmm_t^{\mathrm{fob}} \, mm_t + pq_t \, (xq_t - mq_t)\)