Balance of Payment

A Short Definition

A country’s balance of payments is commonly defined as the record

of transactions between its residents and foreign residents over a specified

period. Each transaction is recorded in accordance with the principles of

double-entry bookkeeping, meaning that the amount involved is entered

on each of the two sides of the balance-of-payments accounts. Conse-

quently, the sums of the two sides of the complete balance-of-payments

accounts should always be the same, and in this sense the balance of

payments always balances.

However, there is no bookkeeping requirement that the sums of the

two sides of a

selected number

of balance-of-payments accounts should be

the same, and it happens that the (im)balances shown by certain combina-

tions of accounts are of considerable interest to analysts and government

officials. It is these balances that are often referred to as “surpluses” or

“deficits” in the balance of payments.

This monograph explains how such measures of balance are derived

and presents standard interpretations of them. Full understanding requires

a grasp of elementary balance-of-payments accounting principles, so these

principles are outlined and illustrated in the first two sections.

Recording of Transactions: General Principles

The double-entry bookkeeping used in accounting for the balance

of payments is similar to that used by business firms in accounting for their

transactions. In ordinary business accounting the amount of each transac-

tion is recorded both as a debit and a credit, and the sum of all debit entries

must, therefore, equal the sum of all credit entries. Furthermore, in business

accounting it is recognized that the total value of the assets employed by

the firm must be equal to the total value of the claims against those assets,

that is, that all the assets belong to someone. As is well known, the claims

against the assets are called the liabilities of the firm. (Assets of the firm not