THE BALANCE OFPAYMENTS (BP)
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Thebalance of payments is the summarystatement of the flow of economic transactions between the residents of onecountry and the rest of the world over a given period of time.
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Thissummary statement comprises of such items as the export and import of all goodsand services; all capital loans abroad and all borrowing from foreigncountries; all gifts to and from foreign countries, including foreign aid; andall movements of gold and international reserves into and out of the country.
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Inthis country, the Department of Commerce is responsible for calculating thebalance of payments.
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How are debits and creditsdefined in international transactions?
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A debit represents the importing of anitem such as a good, a service, a stock or a bond, a bank deposit, orgold. A debit adds to a nation’s demandfor foreign currency. It receives anegative sign (-) in the balance of payments table.
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A credit represents the exporting of anitem such as a good, a service, a stock or a bond, a bank deposit, orgold. A credit item adds to a nation’s supplyof foreign money. It receives apositive (+) in the balance of payments table.
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Consider a few examples toaid in your understanding of the balance of payments:
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Supposea U.S. household purchases a car from Japan.The import of the car into the U.S. is recorded on the debit side (-)and creates a demand for Japanese currency (Yen). It adds to the supply of dollars.
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Supposea U.S. business sells a bond to a British household. The U.S. business, then, exports a bond. This would appear on the credit side (+) ofthe BP. It would increase the supply ofBritish pounds. It adds to the demandfor dollars.
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Supposethe US gives wheat to Egypt. Theexporting of the good, even as a gift, is recorded as a credit (+) and is calleda unilateral transfer.
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Assumea US citizen travels as a tourist to Germany.His expenditures in that country are classified as a debit (-) becausehe purchases (imports) a service (tourism) from that country. It also creates a demand for German marks.
The BP is often divided intothree sections: current account,capital account, and financing method (deficit or surplus). A simplified table is as follows:
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I. Current account
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A.Merchandise
1. Exports (+)
2 Imports (-)
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B.Services
1. Military (net)
2. Travel and transportation (net)
3. Investment income (net)
Balance of goods and services = A +B
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C.Unilateral transfers
1. Government grants (excluding military)
2. Remittances and pensions
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Balance on current account = A + B +C
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II. Capital account
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D.Long-term capital movements or flows
E.Short-term capital movements or flows
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Official reserve transactionsbalance = A + B + C + D + E
“Theline”______________________________________
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(Thereis some debate about where to draw the line to determine the balance ofpayments surplus or deficit. Someeconomists draw the line after long-term capital movements but beforeshort-term capital movements, since short-term assets are temporary and can bewithdrawn at a moments notice.)
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III. Financing (deficit or surplus) method
F.U.S. official reserve assets (net)
G.U.S. liabilities to foreign official agencies
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(Officialreserve assets of the U.S. include (1) gold, (2) convertible foreigncurrencies,
(3)reserve position at the International Monetary Fund (IMF), and Special DrawingRights (SDRs). An SDR created by theIMF in 1968 because of a shortage of international liquidity is the officialunit of account used between the IMF, central banks, and governments. Foreign official agencies are centralbanks of other countries that lend to the U.S. when they experience a deficit.
