Net foreign assets

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.

The traditional balance of payment identity

Traditional balance-of-payment accounting is that the change in net foreign asset position equals the current account. 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.

$\begin{align} \mbox{Change in NFA} & = \mbox{Current Account} \\ \end{align}$

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 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:

$\begin{align} \mbox{Change in NFA} & = \mbox{Current Account} +\mbox{Valuation Effects} \\ \end{align}$

See also

• Net international investment position