balance of payments

(economics) A statement identifying all the economic and financial transactions between companies, banks, private households and public authorities of one nation with those of other nations of the world over a specific time period. A transaction is defined as the transfer of ownership of something that has an economic value measurable in monetary terms from residents of one country to residents of another.
The transfer may involve: (1) goods, which consist of tangible and visible commodities or products; (2) services, which consist of intangible economic outputs, which usually must be produced, transferred, and consumed at the same time and in the same place; (3) income on investments; and (4) financial claims on, and liabilities to, the rest of the world, including changes in a country’s reserve assets held by the central monetary authorities. A transaction may also involve a gift, which is the provision by one party of something of economic value to another party without something of economic value being received in return.
International transactions are recorded in the balance of payments on the basis of the double-entry principle used in business accounting, in which each transaction gives rise to two offsetting entries of equal value so that, in principle, the resulting credit and debit entries always balance. Transactions are generally valued at market prices and are, to the extent possible, recorded when a change of ownership occurs.
These transactions are divided into two broad groups: current account and capital account. The current account includes exports and imports of goods, services (including investment income) and unilateral transfers. The capital account includes financial flows related to international direct investment, investment in government and private securities, international bank transactions and changes in official gold holdings and foreign exchange reserves.
(IMF) The International Monetary Fund (IMF), which strives for international comparability, defines the balance of payments as “a statistical statement for a given period showing (1) transactions in goods, services and income between an economy and the rest of the world, (2) changes of ownership and other changes in that economy’s monetary gold, special drawing rights (SDRs) and claims on and liabilities to the rest of the world, and (3) unrequited transfers and counterpart entries that are needed to balance, in the accounting sense, any entries for the foregoing transactions and changes which are not mutually offsetting.”
(U.S.) The six balances that are currently published quarterly concerning the U.S. balance of payments are:
(1) The balance on merchandise trade, which measures the net transfer of merchandise exports and imports (which differs in some ways from the trade balance published monthly by the Bureau of the Census);
(2) The balance on services, which measures the net transfer of services, such as travel, other transportation, and business, professional, and other technical services (this balance was redefined in 1990 to exclude investment income);
(3) The balance on investment income, which measures the net transfer income on direct and portfolio investments;
(4) The balance on goods, services and income, which measures the net transfer of merchandise plus services and income on direct and portfolio investment (this balance is equivalent to the pre-1990 balance on goods and services; it is also conceptually comparable to net exports of goods and services included in GNP);
(5) The balance on unilateral transfers (net), which measures the net value of gifts, contributions, government grants to foreign countries and other unrequited transfers;
(6) The balance on current account (widely used for analysis and forecasting), which measures transactions in goods, services, income and unilateral transfers between residents and nonresidents.

Was this article helpful?

Related Articles

Need Support?

Can't find the answer you're looking for?
Contact Support