Balance of Payments

BALANCE OF PAYMENTS ACCOUNTING

Balance of Payments

The statistical record of a country`s international transactions over a certain period of time presented in the form of double-entry bookkeeping.

Why balance of payments worth studying for?

1. The balance of payments provides detailed information concerning the demand and supply of a country`s currency.

2. A country`s balance-of-payments data may signal its potential as a business partner for the rest of the world.

3. Balance-of-payment data can be used to evaluate the performance of the country in international economic competition.

Generally speaking, any transactions that results in the receipt from foreigners will be recoded as a credit, with a positive sign, in the U.S. balance of payments, whereas any transaction that gives the rise to a payment to the foreigners will be recorded as a debit, with a negative sign.

Example:Suppose that Boeing Corporation exported a Boeing 747 aircraft to Japan Airlines for $50 million, and that Japan Airlines pay from its dollar bank account kept with Chase Manhattan Bank in New York City. Then, the receipt of $50 million by Boeing will be recorded as a credit (+), which will be matched by a debit (-) of the same amount representing a reduction of the U.S. bank’s liabilities.

Above example summarized as:

TRANSACTIONS | CREDIT | DEBIT |

Boeing’s export | + $50 million | |

Withdrawal from U.S. bank | | -$50 million |

Balance-of-Payments Accounts

Types of country’s international transactions

(1) Current Account

* includes all the export and import of goods and services

Categories:

* Merchandise Trade – represents exports and imports of tangible goods

* Services – include payments and receipts for legal, consulting and engineering , royalties for patents and intellectual properties, insurance premiums, shipping fees and tourist expenditures

* Factor Income – consists largely of payments and receipts of interest, dividends, and...