A Financial Approach to the Balance of Payments

Abstract

A new approach to addressing balance of payments issues by analyzing the constituents of the financial account has been developed in this study and is referred to the financial approach accordingly. It pays attention to the different roles of foreign direct investment (FDI) and international portfolio investment (IPI), both of which have witnessed phenomenal increases in the last four decades. On the one hand, balance on the financial account exclusive of changes in official reserves is no longer negligible or inconsequential, and can no longer be neglected. On the other hand, FDI and IPI differ in countries’ international economic relations, with different effects of FDI and IPI on trade and trade balance in particular. Responding to a noticeably changed global economic environment, this new approach is effective in addressing balance of payments issues in a new era of globalization. The illuminating results lend support to the theoretical propositions, thereby opening up a new line of research for furthering theoretical and empirical inquiries.financial account, foreign direct investment, international portfolio investment, trade balance, current account