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)
“Not in vain is Ireland pouring itself all over the earth. Divine Providence has a mission for her children to fulfill; though a mission unrecognized by political economists. There is ever a moral balance preserved in the universe, like the vibrations of the pendulum. The Irish, with their glowing hearts and reverent credulity, are needed in this cold age of intellect and skepticism.”
—Lydia M. Child (1802–1880)
“So long as the source of our identity is external—vested in how others judge our performance at work, or how others judge our children’s performance, or how much money we make—we will find ourselves hopelessly flawed, forever short of the ideal.”
—Melinda M. Marshall (20th century)