Theme 7. Balance of payments

1. The notion of balace of payments and its characteristic

2. Concept and Types of Transactions. National accounts.

3. Princeples and structure of balance of payments.

1. The notion of balace of payments and its characteristic

The balance of payments is

Balance of Payment is a record pertaining to a period of time; usually it is all annual statement. All the transactions entering the balance of payments can be grouped under three broad accounts; (1) Current Account, (2) Capital Account, and (3) Official International Reserve Account. However, it can be vertically divided into many categories as per the requirement.

Transactions, for the most part between residents and nonresidents, consist of those involving goods, services, and income; those involving financial claims on, and liabilities to, the rest of the world; and those (such as gifts) classified as transfers, which involve offsetting entries to balance—in an accounting sense—one-sided transactions. A transaction itself is defined as an economic flow that reflects the creation, transformation, exchange, transfer, or extinction of economic value and involves changes in ownership of goods and/or financial assets, the provision of services, or the provision of labor and capital.

Closely related to the flow-oriented balance of payments framework is the stock-oriented international investment position. Compiled at a specified date such as year end, this investment position is a statistical statement of (1) the value and composition of the stock of an economy’s financial assets, or the economy’s claims on the rest of the world, and (2) the value and composition of the stock of an economy’s liabilities to the rest of the world. In some instances, it may be of analytic interest to compute the difference between the two sides of the balance sheet. The calculation would provide a measure of the net position, and the measure would be equivalent to that portion of an economy’s net worth attributable to, or derived from, its relationship with the rest of the world. A change in stocks during any defined period can be attributable to transactions (flows); to valuation changes reflecting changes in exchange rates, prices, etc.; or to other adjustments (e.g., uncompensated seizures). By contrast, balance of payments accounts reflect only transactions.

The basic convention applied in constructing a balance of payments statement is that every recorded transaction is represented by two entries with equal values. One of these entries is designated a credit with a positive arithmetic sign; the other is designated a debit with a negative sign. In principle, the sum of all credit entries is identical to the sum of all debit entries, and the net balance of all entries in the statement is zero.

In practice, however, the accounts frequently do not balance. Data for balance of payments estimates often are derived independently from different sources; as a result, there may be a summary net credit or net debit (i.e., net errors and omissions in the accounts).