Balance_of_payments

The Balance of Payments (BOP) is a measure of all the financial transactions flowing between one country and all other countries during a specific period, usually a quarter or a year. It is also the name of the official record of these transactions. A positive, or favorable, balance of payments is one in which more payments have come in to a country than have gone out. A negative or unfavorable balance means more payments are going out than coming in.

Contents

1 Components
2 Recording Procedures

2.1 Credits and debits
2.2 Prices and currency issues


3 Policy Uses
4 IMF Balance of Payments Manual
5 See also
6 Notes
7 References
8 External Links
9 Credits



The BOP is a major indicator of a country's status in international trade, and a reflection of its economic well-being or vulnerability. The balance of trade is one component of the balance of payments. It is also a sign of the productiveness of a people and a reflection of whether they are primarily producers or consumers.
Producing nations grow while consuming nations eventually deplete their resources and collapse as fewer people are able to access them.

Components
Within any country, the BOP record comprises three "accounts": the current account, which includes primarily trade in goods and services (often referred to as the balance of trade), along with earnings on investments; the capital account, including transfers of non-financial capital such as debt forgiveness, gifts and inheritances; and the financial account, essentially trade in such assets as currencies, stocks, bonds, real estate, and gold, among others.[1][2]
Each of these components is further divided into subcomponents. Thus, for example, the current account comprises trade in merchandise, trade in services (such as tourism and law), income receipts such as dividends, and unilateral transfers of money, including direct foreign aid. (To economists, the current account is viewed as the difference between exports and capital inflows, on one hand; and on the other hand, imports and capital outflows.)
Likewise, the capital account includes such "transfers" as debt forgiveness, money that migrant workers take home with them when they leave the country or bring with them as they enter the country, and sales and purchases of natural resources. The financial account consists both of assets owned abroad, and of foreign-owned assets within the country.[3]
In the financial account, if foreign ownership of domestic financial assets has increased more quickly than domestic ownership of foreign assets in a given year, then the domestic country has a financial account surplus. On the other hand, if domestic ownership of foreign financial assets has increased more quickly than foreign ownership of domestic assets, then the domestic country has a financial account deficit. The United States persistently has the largest capital (and financial) surplus in the world,[4] but as of 2006 had a large account deficit.[5] To a significant extent, this reflects that the United States imports far more than it exports.
Taken together, the capital and financial accounts consist of "capital transfers, direct investments [in which the investor has a permanent interest], portfolio investments [stocks, bonds, notes and the like] and other forms of investment [financial derivatives, loans, etc.]."[6]

Recording Procedures
The method of recording these payments explains the "balance." As payments leave or enter a country—perhaps to finance a purchase, or to invest in a foreign corporation—the transactions are recorded as both debits and as credits, in accordance with the practice of double-entry bookkeeping that is the standard business accounting practice.[7] For example, when a country or any of its citizens buys a foreign good—such as furniture—that is treated as an increase in the asset of furniture. Therefore, that recording is made, according to convention, by a debit-entry in the books of the current account (i.e., on the left side of the ledger). At the same time, that same entry is countered, or balanced, by a decrease in the asset of money, which is recorded by a credit-entry (on the right side of the ledger) of the capital account.

Credits and debits
In brief, according to the International Monetary Fund, a country "records credit entries for (a) exports of goods and services, provision of services, provision of the factors of production to another economy, and (b) financial items reflecting a reduction in the [country's] external assets or an increase in external liabilities." Likewise, it records debit entries for "(a) imports of goods, acquisition of services, use of production factors provided by another economy, and (b) financial items reflecting an increase in assets or a decrease in liabilities."[8]
Therefore, the current account should always balance, or equal, the sum of the capital and financial accounts. For example, when a country "buys more goods and services than it sells [resulting in] a current account deficit, it must finance the difference by borrowing, or by selling more capital assets than it buys [resulting in] a capital account surplus. A country with a persistent current account deficit is, therefore, effectively exchanging capital assets for goods and services."[9]
In practice, however, perfect balancing is not always the case, given "statistical discrepancies, accounting conventions, and exchange rate movements that change the recorded value of transactions."[10]

Prices and currency issues
The value of each balance of payments transaction is measured largely by market prices, or the prices actually paid between a buyer and a seller, rather than the price that is officially quoted.[11] Those prices, in turn, are usually recorded in terms of a country's domestic currency. However, for international comparisons, economists use a more stable or solid currency, such as the U.S. dollar.
Currency strength, therefore, is one of several factors influencing a nation's balance of payments, and indeed its overall economy. (Other factors include degree of industrialization, education and skill levels of labor force, stability of government, etc.) For example, if a domestic currency is "over valued [relative to other currencies], the balance of payments would be in deficit, money would be reduced, and deflation would be imposed, bringing in its wake unemployment. On the other hand, if a currency is undervalued, balance of payments surplus would produce inflationary pressure that could change expectations and set in motion a wage explosion that might overshoot the equilibrium."[12]

Policy Uses
Data from the balance of payments, along with information from a country's International Investment Position (a record of the nation's stock of outstanding foreign assets and liabilities) are useful as indicators for economic policy makers. For example, a current account deficit, which usually reflects an imbalance between imports and exports, may suggest a policy "directed to increase competitiveness in the global market for local products and/or develop new industries that will produce import substitutes," or a policy focused on currency exchange rates,such as devaluation.[13]
Likewise, a steep current account deficit can lead policy makers to impose tariffs, which effectively slow imports, or lower interest rates, which enable domestic manufacturers to lower their own prices, thereby better competing with demand for imports. Other measures suggested by payments imbalances might include restrictive monetary and fiscal policies, or increasing borrowing.[14]

IMF Balance of Payments Manual
The Balance of Payments Manual is a manual published by the IMF that provides accounting standards for balance of payments reporting and analysis for many countries. The Bureau of Economic Analysis adheres to this standard.
The sixth edition was released in prepublication form in December 2008. Its title has been amended to Balance of Payments and International Investment Position Manual to reflect that it covers not only transactions, but also the stocks of the related financial assets and liabilities.
The following list of countries and territories by current account balance (CAB) is based on the International Monetary Fund data for 2007, obtained from the World Economic Outlook database (October 2008).[15] Numbers for 2008 should become available in April 2009. Estimates are highlighted.



Rank
Country
CAB USD, bn


1
 People's Republic of China
371.833


2
 Germany
252.501


3
 Japan
210.967


4
 Saudi Arabia
95.762


5
 Russia
76.163


6
 Switzerland
70.797


7
 Norway
59.983


8
 The Netherlands
52.522


9
 Kuwait
48.039


10
 Singapore
39.157


11
 United Arab Emirates
39.113


12
 Sweden
38.797


13
 Taiwan
32.979


14
 Algeria
30.600


15
 Malaysia
29.181


16
 Iran
28.776


17
 Hong Kong
28.038


18
 Libya
23.786


19
 Qatar
21.374


20
 Venezuela
20.001


21
 Thailand
15.765


22
 Canada
12.726


23
 Austria
12.012


24
 Finland
11.268


25
 Argentina
11.072


26
 Indonesia
11.010


27
 Belgium
9.648


28
 Azerbaijan
9.019


29
 Chile
7.200


30
 Angola
6.936


31
 Philippines
6.351


32
 Brunei
5.990


33
 South Korea
5.954


34
 Trinidad and Tobago
5.380


35
 Israel
5.197


36
 Luxembourg
4.893


37
 Uzbekistan
4.267


38
 Turkmenistan
4.037


39
 Denmark
3.512


40
 Nigeria
3.466


41
 Oman
3.222


42
 Bahrain
2.906


43
 Botswana
1.974


44
 Egypt
1.862


45
 Bolivia
1.741


46
 Gabon
1.719


47
 Brazil
1.712


48
 Peru
1.515


49
 Namibia
1.356


50
 Timor-Leste
1.161


51
 Ecuador
1.064


52
 Myanmar
0.917


53
 Bangladesh
0.780


54
 Equatorial Guinea
0.541


55
 Papua New Guinea
0.259


56
 Paraguay
0.227


57
 Bhutan
0.132


58
 Chad
0.116


59
 Mongolia
0.098


60
 Afghanistan
0.081


61
 Suriname
0.071


62
 Lesotho
0.058


63
 Nepal
0.050


64
 Kyrgyzstan
-0.006


65
 Guinea-Bissau
-0.008


66
 Solomon Islands
-0.010


67
 Kiribati
-0.021


68
 Tonga
-0.025


69
 Samoa
-0.029


70
 Comoros
-0.031


71
 Swaziland
-0.041


72
 São Tomé and Príncipe
-0.044


73
 Eritrea
-0.049


74
 Vanuatu
-0.049


75
 Belize
-0.054


76
 Sierra Leone
-0.063


77
 Haiti
-0.066


78
 Malawi
-0.074


79
 Central African Republic
-0.075


80
 Dominica
-0.079


81
 Gambia
-0.080


82
 Guinea
-0.083


83
 Morocco
-0.099


84
 Cape Verde
-0.132


85
 Liberia
-0.137


86
 Côte d'Ivoire
-0.146


87
 Saint Vincent and the Grenadines
-0.147


88
 Saint Kitts and Nevis
-0.150


89
 Burundi
-0.156


90
 Togo
-0.160


91
 Zimbabwe
-0.165


92
 Rwanda
-0.168


93
 Uruguay
-0.186


94
 Democratic Republic of the Congo
-0.191


95
 Guyana
-0.195


96
 Grenada
-0.197


97
 Antigua and Barbuda
-0.211


98
 Djibouti
-0.211


99
 Macedonia
-0.234


100
 Barbados
-0.245


101
 Seychelles
-0.263


102
 Saint Lucia
-0.280


103
 Cambodia
-0.313


104
 Niger
-0.321


105
 Mauritania
-0.321


106
 Uganda
-0.331


107
 Benin
-0.372


108
 Cameroon
-0.383


109
 Malta
-0.403


110
 Tajikistan
-0.414


111
 Maldives
-0.476


112
 Mali
-0.502


113
 Fiji
-0.515


114
 Mauritius
-0.553


115
 Burkina Faso
-0.560


116
 Syria
-0.561


117
 Armenia
-0.591


118
 Laos
-0.711


119
 Moldova
-0.747


120
 Mozambique
-0.768


121
 Zambia
-0.810


122
 Kenya
-0.825


123
 Ethiopia
-0.868


124
 Tunisia
-0.925


125
 Albania
-0.994


126
 Nicaragua
-1.047


127
 Madagascar
-1.070


128
 El Salvador
-1.119


129
 Senegal
-1.161


130
 Honduras
-1.228


131
 Yemen
-1.328


132
 Sri Lanka
-1.370


133
 Montenegro
-1.381


134
 Bahamas
-1.440


135
 Republic of the Congo
-1.479


136
 Tanzania
-1.496


137
 Costa Rica
-1.519


138
 Panama
-1.571


139
 Ghana
-1.652


140
 Guatemala
-1.685


141
 Jamaica
-1.850


142
 Bosnia and Herzegovina
-1.920


143
 Georgia
-2.045


144
 Cyprus
-2.063


145
 Dominican Republic
-2.231


146
 Slovenia
-2.250


147
 Jordan
-2.778


148
 Iceland
-2.952


149
 Belarus
-3.060


150
 Czech Republic
-3.085


151
 Lebanon
-3.129


152
 Estonia
-3.776


153
 Slovakia
-4.070


154
 Croatia
-4.410


155
 Ukraine
-5.272


156
 Lithuania
-5.692


157
 Sudan
-5.812


158
 Mexico
-5.813


159
 Colombia
-5.862


160
 Latvia
-6.231


161
 Serbia
-6.334


162
 Pakistan
-6.878


163
 Hungary
-6.932


164
 Vietnam
-6.992


165
 Kazakhstan
-7.184


166
 Bulgaria
-8.464


167
 New Zealand
-10.557


168
 Ireland
-14.120


169
 India
-15.494


170
 Poland
-15.905


171
 South Africa
-20.557


172
 Portugal
-21.987


173
 Romania
-23.234


174
 France
-30.588


175
 Turkey
-37.684


176
 Greece
-44.218


177
 Italy
-52.725


178
 Australia
-56.342


179
 United Kingdom
-105.224


180
 Spain
-145.141


181
 United States
-731.214 [16]


See also
Current account
Capital account
Balance of trade
Floating currency
Capital surplus
International investment position
Foreign exchange reserves
Sovereign wealth fund
Money supply
United States public debt
FRED (Federal Reserve Economic Data)
Pink Book
Milton Friedman
Notes

↑ Fedpoint: "Balance of Payments," Federal Reserve Bank of New York, Retrieved May 30, 2009.

↑ OECD Glossary of Statistical Terms oecd.org. Retrieved May 30, 2009.

↑ Fedpoint

↑ Economic Report of the President 2006,
Chapter 6 - The US Capital Account Surplus usembassy. Retrieved May 30, 2009.

↑  IMF, 2007, "Balance of Payments Statistics Yearbook 2007," Part 2, Table A2

↑ Michael R. Darby, May 1990, "The Balance of Payments of the United States," U.S. Department of Commerce, Washington, DC, Page 26., Retrieved May 30, 2009.

↑  Norman S. Fieleke, October 1996, Federal Reserve Bank of Boston, What is the Balance of Payments?

↑ International Monetary Fund, 1996 Balance of Payments Textbook. (IMF, Washington, DC), page 3

↑ Fedpoints

↑ Fedpoints

↑ IMF Balance of Payments Textbook, 5

↑ Robert Mundell, "Exchange Rate Arrangements in the Transition Economies," in Mario I. Blejer & Marko Skreb, (eds.), Balance of Payments, Exchange Rates, and Competitiveness in Transition Economies. (Boston: Kluwer Academic Publishers, 1999). online [1]. books.google. Retrieved July 10, 2009.

↑  "Balance of Payments," June 2008, Bangko Sentral ng Pilipinas (Central Bank of the Republic of the Philippines), Retrieved May 30, 2009.

↑  "Balance of Payment Policies," Biz.Ed. Retrieved May 30, 2009.

↑ Current account balance, U.S. dollars, Billions from IMF World Economic Outlook Database, October 2008

↑ Current account balance, U.S. dollars, Billions from IMF World Economic Outlook Database, October 2008


ReferencesISBN links support NWE through referral fees
Anderton, Alain. Economics Third Edition. Causeway Press, 2000. ISBN 978-1902796116
Balance of Payments Statistics Yearbook 2007. Washington, DC: Intl Monetary Fund, 2007. ISBN 978-1589066564
Bamford, C. G. AS and A Level Economics. Cambridge University Press, 2002. ISBN 978-0521007818
Begg, David, Stanley Fischer, and Rudiger Dornbusch. Economics. McGraw-Hill Education, 2008. ISBN 978-0077119669
Ellen Frank, Where Do U.S. Dollars Go When the United States Runs a Trade Deficit? Dollars & Sense Magazine Retrieved June 25, 2019.
External Links
All links retrieved December 31, 2021.

Sixth Edition of the IMF's Balance of Payments and International Investment Position Manual, December 2008.




International trade


Definitions


Balance of payments ·
Current account (Balance of trade) ·
Capital account ·
Foreign exchange reserves ·
Sovereign wealth funds ·
Net Capital Outflow ·
Comparative advantage ·
Absolute advantage ·
Import substitution ·
International trade




Organizations and policies


World Trade Organization ·
International Monetary Fund ·
World Bank Group ·
International Trade Centre ·
Trade bloc ·
Free trade zone ·
Trade barrier ·
Import quota ·
Tariff




Schools of thought


Free trade ·
Balanced trade ·
Mercantilism ·
Protectionism




Related issues


Globalization ·
Outsourcing ·
Trade justice ·
Fair trade





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