Analyzing Economies of Germany, Bosnia and Herzegovina

The balance of payments statement is an annual document that reports a nation's economic activity in the world market. The current account as well as the financial and capital accounts make up the bulk of the statement; there is also an account of reserves and a calculated error. While every country's balance of payments statement is organized in an identical manner, the development level of a nation has a large effect on the data and statistics that the document contains. Bosnia and Herzegovina, a developing country, formerly part of Yugoslavia, in Southern Europe, for example, has a balance sheet that is significantly different from that of Germany, one of the world's most evolved economies. This paper will discuss the balance of payments statements for both Bosnia and Herzegovina and Germany separately as well as in comparison to one another, highlighting the variation that is evident in international trade in developed countries and countries with developing economies.

The current account on a balance of payments statement shows the value of goods and services traded between a nation and the rest of the world. Bosnia and Herzegovina's current account totals to the equivalent of -2,087.4 billion United States dollars, meaning that the country imported more goods and services than it exported, and has a current account deficit. The majority of these transactions involved a transfer of goods; the statement shows that $2,580.0 billion of goods were exported while $7,534.3 billion worth of goods were imported. A country, such as Bosnia and Herzegovina, that imports three times more than it exports may run a risk for high unemployment. This problem may be magnified when, as is the case in this example, one hundred percent of the imported merchandise is composed of finished products rather than raw materials. Were the country to either produce more goods to export and consume or import goods that must be processed to create finished merchandise, additional jobs would be created, which could potentially advance the economy of a developing nation. Another problem that a high trade deficit can cause is the potential fall in value of the marka (currency of Bosnia and Herzegovina) relative to other currencies; this can cause the country to be able to import fewer goods and services for every good or service exported. Every year since 2000, the marka has, in fact, fallen in comparison to the U.S. dollar, going from a conversion rate of 2.1229 marka per dollar in 2000 to a rate of 1.5725 marka per dollar in 2005. The current account is also where international income (from investment as well as employee compensation) and unilateral transfers are recorded; Bosnia and Herzegovina netted a positive balance in both of these groups of transactions; a large part of this income is worker remittances, which implies that many Bosnians are employed in foreign countries and choose to send their earnings to their home country to support relatives.

Germany's current account, in comparison, has a surplus with a trade balance of $116.03 billion, meaning that the nation's exports exceed its imports. As was the case with Bosnia and Herzegovina, the bulk of Germany's transactions are exchanges of merchandise, rather than of services. While the combination of goods and services nets a trade surplus, individually, these categories vary. The nation nets a surplus of $189.27 billion in goods, yet has a total deficit of $47.91 billion; combined, Germany has a positive balance on goods and services of $141.35 billion. Germany, having a more evolved economy than Bosnia and Herzegovina, also has a large value of money, as debits as well as credits, being exchanged as investment. Over three hundred billion US dollars worth of investment income was listed on Germany's balance of payment statement, including credits and debits in equity income, income on bonds and notes, income on money market instruments, direct investment income, interest, portfolio investment income, and dividends.

The second aspect of the balance of payments statement is the capital and financial accounts. These accounts chart foreign investment in the country and by the country. Bosnia and Herzegovina's financial account shows that while there is some direct investment in Bosnian firms, there is no direct investment abroad (although there was some, in minimal amounts, in 2004). Foreign direct investment in Bosnian firms has increased by four hundred and fifty percent since 1998. This suggests a sharp increase in the economic stability of the nation over the last decade. Other major factors of the Bosnia and Herzegovina capital and financial accounts are liabilities, particularly loans, and capital transfers. The country does not, however, have any portfolio investments. The combined capital and financial accounts are in a surplus, which compensates for the deficit of the current account.

As Germany's current account is in a surplus, however, its capital and financial accounts balance by being in a deficit. The portfolio investment and direct investment accounts have a great deal of activity, suggesting that financial investment is a major source of revenue as well as economic growth for Germany. A $47.13 billion increase in direct investment in Germany between 2004 and 2005 implies that investors see the nation as being economically stable, although a recession could cause this number to drop quickly.

Reserve assets on the balance of payments statement account for the changes in official reserve assets of the nation. Germany's reserves are fairly constant, which denotes a high level of stability in the German economy. Bosnia and Herzegovina, on the other hand, have a sharp decline in reserve assets, especially in foreign exchange, which suggests that they may be compensating for a declining market value, which signifies a relatively unstable economy.

Lastly, each balance of payments statement has a net errors and omissions listing, under which statistical discrepancies are resolved by forcing the balance of payments statement to sum up to zero. Germany's net errors and omissions account comes to a positive $14.05 billion, while Bosnia and Herzegovina's is $603.9 billion. This may be partially because of technological advancements in data collection and processing that Bosnia and Herzegovina do not have access to, or may be a further indication of relative instability in the developing economy.

Based on their balance of payments statements, Germany clearly has a more advanced and stable economy than Bosnia and Herzegovina, although the Bosnian economy does appear to be improving and becoming more stable. Germany shows evidence of having a more diversified economy, while Bosnia and Herzegovina's economy is simpler and more streamlined, though lacks much of the opportunity for profit that Germany provides. Germany's stable economy, evident in increasing direct investment and stable reserve assets, encourages more foreign investment in it than in Bosnia and Herzegovina's relatively unstable economy, shown by rapidly decreasing reserve assets.

Works Cited:

2007Balance of Payments Statement for Bosnia and Herzegovina

2007 Balance of Payments Statement for Germany