Current Account Balance

Foreign Trade Balance

Dr. Yesim HELHEL
 FOREIGN TRADE BALANCE
• The difference between the foreign currency payments made by a country for
the goods imported and foreign currency income earned from the goods sold
to abroad is called the foreign trade balance:
• Foreign trade balance = goods export revenues – goods import expenses

• There can be one of three equilibrium states:

• If goods export revenues = goods import expenses, there is foreign trade
balance.
• Goods export revenues > Goods import expenses, there is foreign trade
surplus.
• Goods export revenues < Goods import expenses, there is a foreign trade
deficit.
• A country does not just export and import goods. It also imports and exports
services. In addition, the country has foreign exchange gains or losses such as
transportation income and expenses, interest income and expenses. If we add
these to the goods, foreign trade balance becomes current balance.
• Current balance = (revenues from exports of goods + revenues from services sold + other
revenues) – (expenses for imports of goods + expenses paid for services purchased + other
expenses) +/- current transfers

• Services;
• It consists of items such as transportation, tourism, communication services,
construction services, insurance services, financial services, personal and
cultural services. When we render these services to foreigners,revenue is
obtained, and when we purchase these services from foreigners, expense
exists.
• Other revenues/expenses; It includes amounts such as interest, share earnings,
dividend, income obtained from direct investment, portfolio investments and
other investments. When we get these revenues from foreigners, we record as
income, when we pay for foreigners, we record as expense.
• Current transfers (Unrequited transfers); For example, the money sent by our
citizens working abroad falls into this category.
• There can be one of three equilibrium states:
• If the revenues /income(first paranthesis) are greater than expense (second
paranthesis), there is a current account surplus,
• In the case of reverse condition, there is a current account deficit.
• If both are equal, current balance exists
• The Turkish economy has been an economy with a current account deficit. In
other words, in Turkish economy, foreign exchange revenues it receives in
return for the goods sold and the services rendered are lower than the foreign
exchange expenses it paid for the goods and services purchased from abroad.
• The resulting deficit must be financed in several ways:
• (1) Foreign currency debt can be taken from abroad,
• (2) Direct Foreign capital investment can be attracted from abroad,
• (3) Indirect Portfolio investment (investment in stock market or bonds and bills)
can be attracted from abroad,
• (4) Existing foreign exchange reserves can be used.
 How Does a Current Account Deficit Exist?
• In an economy where capital flows are not free, savings and investments are
equal. In other words, the more savings the society has, the higher the limit of
the investment amount it can make.
• On the other hand, in an economy that is open to the outside world and free of
capital flows, investments may be higher than domestic savings. In this case,
the difference is made up by the use of external savings.
• If the investments in an economy are higher than the savings, this economy
compensates for this difference by borrowing the savings of other economies
or by attracting capital flows.
• Jan-Oct 2022 Current Account Balance is as follows:
• Export : 208.803 mio $
• Import : 283.219 mio $
• Service Revenue: 76.398
• Service Expense: 31.391
• Other Revenue: 6.136
• Other Expense:13.815
• Current Transfer: -548
• Foreign Trade Deficit= 208.803-283.219=(74.416)
• Current Account =(-74.416)+(76.398-31.391)+(6.136-13.815)+ (-548)
• Current Account= -38.176
Balance of Payments Assistance (Support)
• If there is a current account deficit, how is deficit financed?
• Direct foreign investment
• Indirect Foreign investment (Portfolio investment)
• Other investment
• Net Errors and omissions
• Reserves
• Jan-Oct 2022 Current Account Deficit 6.264 mio $
• Foreign Direct Investment = Direct Investment by foreigners in Turkiye –
Direct Investment by Turkish citizens abroad.
• we calculate the net foreign currency inflow to the country for direct
investments.
• Portfolio Investment = Assets – Liabilities . Stocks and debt securities are
included in the portfolio account. Stocks and debt securities belonging to
foreigners that are in our hands constitute assets, and those that are in the
hands of foreigners constitute liabilities.
• Other Investments = Assets – Liabilities. In this balance, assets are our
receivings from foreign countries, our deposits abroad and other assets, and
liabilities include foreigners' loan receivables from us (syndicated loans,
commercial loans taken by companies) and deposits in our banks.
• Net Errors and Omissions: Currency movements whose origin is unknown or
cannot be fully accounted for. If it is positive, more foreign currency entered
the country than taken into account, negative means more foreign currency
came out of the country than taken into account.
• Net errors and omissions are caused by measurement errors and incomplete or
over compilation of data in the table. Among the reasons for the occurrence of
net errors and omissions, we can count the following:
• (1) Time inconsistencies (such as the departure date of the exported goods and
the arrival of the money to be received in return for the exported goods are in
different periods.)
• (2) Inaccuracies or errors in the declaration (such as deficiencies or mistakes in
the customs declarations.)
• (3) Informality (Income not recorded). or unregistered financing.)
• (4) Measurement errors in the surveys (such as the fact that the surveys
applied to determine tourism revenues do not fully reflect the truth.)