Balanza de pagos 2: cuenta financiera

Understanding the Balance of Payments

Overview of Previous Class

• The previous class covered the structure of the balance of payments, focusing on the current account and its components.

Current Account Deficit Implications

• Discusses what happens when a country, like Spain, experiences more money leaving than entering. This situation is analogous to a family facing financial strain.

• A country must either use its savings or borrow money if it has a deficit.

Options for Addressing Financial Imbalance

Using Savings

• Countries maintain foreign currency reserves that can be utilized when there is an outflow of money. These reserves are built from transactions involving tourists and businesses exchanging currencies.

Borrowing Money

• If savings are insufficient, countries will need to borrow funds from other nations, which reflects in the financial account.

Financial Account Overview

• The financial account records all loans between countries and indicates whether Spain is lending more to or borrowing more from the rest of the world.

Types of Operations in Financial Account

Direct Investments

• Direct investments involve companies investing in foreign markets for long-term benefits (e.g., Zara opening stores in the U.S.).

Portfolio Investments

• Portfolio investments include buying stocks or bonds for short-term returns (e.g., Spanish investors purchasing shares in Apple).

Other Investments

• Includes deposits or loans between companies across borders (e.g., a Spanish bank lending to an English bank).

Financial Derivatives

• Involves complex financial instruments; less focus on this area as it complicates analysis.

Currency Reserves Management

• Discusses how exports generate currency inflows while imports lead to outflows. Loans also affect currency reserves.

Accounting Differences Between Current and Financial Accounts

Understanding Financial Assets and Liabilities

Key Concepts of Financial Assets and Liabilities

• The distinction between financial assets and liabilities is crucial when making investments abroad. An investment, such as a loan, creates a right to receive money in the future.

• When Spain invests in Argentina, it acquires a financial asset (a right to collect money), while Argentina incurs a financial liability (an obligation to repay the loan with interest).

• Proper accounting requires differentiating between financial assets (rights to collect) and liabilities (obligations to pay). Spanish investments abroad create rights, while foreign investments in Spain create obligations.

Accounting for Financial Transactions

• To determine the net balance of financial transactions, subtract total liabilities from total assets. This provides insight into the overall financial position.

• Example: Zara's investment of €7,000 in Miami represents an acquisition of a financial asset since it expects future profits from this investment.

Foreign Investments Impacting Financial Position

• A Mexican purchasing shares in Telefónica for €8,000 results in Telefónica acquiring a liability (obligation to pay dividends), while the Mexican gains a financial asset.

• A Spanish bank lending €9,000 to a Peruvian bank also reflects an increase in Spanish financial assets due to expected future repayments with interest.

Calculating Net Financial Position

• The calculation of net position involves summing all acquired assets and subtracting any incurred liabilities. For instance, if total assets are €16,000 and liabilities are €8,000, there is an excess of €8,000.

Importance of Currency Reserves