The Augmented Balance of Payments Identity
The traditional balance of payments identity does not take into account changes in asset prices and exchange rates. For example, the value of external assets or liabilities can change due to higher or lower stockmarket prices or a default/write-off on debt. Similarly, changes in exchange rates will affect the value of foreign assets and liabilities. An appreciation of a country's currency will decrease both the value of assets denominated in foreign currency and the burden of liabilities denominated in foreign currency. The value of assets and liabilities denominated in the home currency will not be affected by changes in the exchange rate.
Suppose the same country has some assets it owns abroad, and the value of these assets appreciates by $700 billion. The appreciation of asset prices, referred to as "positive valuation effects" in this case exactly offsets the current account deficit. At the end of the day, the country's net foreign asset position remains unchanged, despite the $700 billion current account deficit.
The effect will be the same if the value of the country's external liabilities falls by $700 billion, or the gains in value of its foreign assets minus the gains in value of its liabilities is $700 billion.
The net foreign asset position equals the current account plus valuation effects:
Read more about this topic: Net Foreign Assets
Famous quotes containing the words augmented, balance and/or identity:
“Another success is the post-office, with its educating energy augmented by cheapness and guarded by a certain religious sentiment in mankind; so that the power of a wafer or a drop of wax or gluten to guard a letter, as it flies over sea over land and comes to its address as if a battalion of artillery brought it, I look upon as a fine meter of civilization.”
—Ralph Waldo Emerson (1803–1882)
“... idleness is an evil. I don’t think man can maintain his balance or sanity in idleness. Human beings must work to create some coherence. You do it only through work and through love. And you can only count on work.”
—Barbara Terwilliger (b. c. 1940)
“Adultery is the vice of equivocation.
It is not marriage but a mockery of it, a merging that mixes love and dread together like jackstraws. There is no understanding of contentment in adultery.... You belong to each other in what together you’ve made of a third identity that almost immediately cancels your own. There is a law in art that proves it. Two colors are proven complimentary only when forming that most desolate of all colors—neutral gray.”
—Alexander Theroux (b. 1940)