Understanding the Balance of Payments: A Comprehensive Overview

The balance of payments is a macroeconomic tool that measures the situation of all commercial activities, services and capital movements that occur in a country in its foreign relations.

It helps us know all the payments that are made and the income that is received nationwide.

Balance of payments structure

In the balance of payments there are the following four main accounts:

Current account: The current account balance is the most important of all. It includes the export and import of goods, services, primary income and secondary income.

In Paraguay we can find this account broken down as follows, in the economic annex of the Central Bank:

• Estate
  • Exports
  • Imports
• Services
  • Manufacturing on physical inputs belonging to others
  • Transport
  • Trips
  • Other services
• Primary Income
  • Employee remuneration
  • Investment income
    • direct investment
    • Portfolio investment
    • Another investment
    • Reserve assets
  • Other primary income
• Secondary income
  • Personal transfers

Capital account: This account simply records the movements of the country’s capital, which would be capital transactions.

Financial account: This account contains investments and deposits made from abroad. Loans requested from the country abroad are also included.

In the breakdown of the Central Bank of Paraguay we can see the following accounts:

• direct investment
• Portfolio investment
• Financial derivatives
• Another investment
  • Assets
    • Other equity participations
    • Currency and deposits
    • Loans
    • Insurance, pensions and standardized guarantee mechanisms
    • Commercial credits and advances
    • Other accounts receivable
  • Passives
    • Other equity participations
    • Currency and deposits
    • Loans
    • Insurance, pensions and standardized guarantee mechanisms
    • Commercial credits and advances
    • Other accounts payable
    • Special drawing rights (SDRs)

Errors and omissions: Errors and omissions include transactions that could not be recorded

General equation

All of the accounts mentioned above would leave us with the following general equation:

Balance of payments = Current account + Capital account + Financial account + Errors and omissions

When adding all the accounts, the result must be equal to 0, this means that the balance of payments will always be balanced. Likewise, independently, these accounts can suffer surpluses or deficits.

In Paraguay, reserve assets are also added to this equation.