Net foreign assets
Encyclopedia
In economics
, the concept of net foreign assets relates to balance of payment identity.
The net foreign asset (NFA) position of a country is the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigners. The net foreign asset position of a country reflects the indebtedness of that country.
. In words, if a country runs a $700 billion current account deficit, it has to borrow exactly $700 billion from abroad to finance the deficit and therefore, the country's net foreign asset position falls by $700 billion.
" will exactly offset the current account. At the end of the day, the country's net foreign asset position remains unchanged, despite the $100 billion current account deficit.
The effect will be the same if the value of the country's liabilities falls by $100 billions, or the gains in value of its foreign assets minus the gains in value of its liabilities is $100 billions.
The net foreign asset position equals the current account plus valuation effects
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Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, the concept of net foreign assets relates to balance of payment identity.
The net foreign asset (NFA) position of a country is the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigners. The net foreign asset position of a country reflects the indebtedness of that country.
The traditional balance of payment identity
Traditional balance-of-payment accounting is that the change in net foreign asset position equals the current accountCurrent account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...
. In words, if a country runs a $700 billion current account deficit, it has to borrow exactly $700 billion from abroad to finance the deficit and therefore, the country's net foreign asset position falls by $700 billion.
The new balance of payment identity
The traditional balance of payment identity does not take into account the changes in asset prices. Suppose the same country has some assets it owns abroad, and the value of the assets appreciates by $100 billion. The appreciation of asset prices, referred to as "positive valuation effectsValuation effects
Valuation Effects is a term in economics.Valuation Effects of a country are the changes in the value of assets it holds abroad, minus the changes in the value of domestic assets held by foreign investors.- Valuation Effects:...
" will exactly offset the current account. At the end of the day, the country's net foreign asset position remains unchanged, despite the $100 billion current account deficit.
The effect will be the same if the value of the country's liabilities falls by $100 billions, or the gains in value of its foreign assets minus the gains in value of its liabilities is $100 billions.
The net foreign asset position equals the current account plus valuation effects
Valuation effects
Valuation Effects is a term in economics.Valuation Effects of a country are the changes in the value of assets it holds abroad, minus the changes in the value of domestic assets held by foreign investors.- Valuation Effects:...
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