The Balance of International Payments
In international economic intercouses, the residents of the country engage
in a variety of transactions with residents of other countries.These transactions
such as exports and imports of goods, services rendered,are interrelated in
many ways, and together they comprise the international payments of a country.
Balance of Payments Statements are compiled on a double-entry system
of accounting.All receipts(increases in liabilities or decreases in assets) are
recorded as credit items(plus items), while all payments(increases in assets
or decreases in liabilities) are recorded as debit items(minus items).
I:The Structure of Balance of Payments Statements:
1.Current account:
The current account includes four sub-accounts:goods; services; income
and unilateral Transfers.
Services include all receipts and payments between the residents and
foreigners on transportation, insurance,travel, communication, etc.
Income includes Compensation of Employees and Investment Income.
Unilateral transfers are transactions that are only one-sided since there is
no offsetting payment. Private transfers consist of institutional expenditures
for missionary,charitable, educational and others of like purposes.Government
transfers include pension,tax receipt from non-residents, non-military grants
and others.
2.Capital Account:
The capital account records the changes in a country's international
financial assets and liabilities, but excluding changes in official reserves, over
the balance of payments period. It usually consists of two sub-accounts:
Capital Transfers:Investment Grants and Debt Cancellation Acquisition of
Non-product, Nonfinancial Assets
3.Financial Account
Financial Account records the changes of investment between residents
and non-residents,including
Direct Investment
Portfolio Investment
Other Investment
4.Net errors and Omissions
In fact, two offsetting entries may not be made explicitly and
simultaneously for each transaction;instead, different items are rercorded
separately on the basis of statistical or aggregate data drawn from a variety
of sources.Because some of these sources are incomplete or inaccurate,
the item is needed to bring the total debits and credits into an arithmetic
equilibrium.
5.Reserves and Related Items.
They comprise:foreign exchange in convertible currencies; reserve
position in the International Monetary Fund;allocation of Special Drawing
Rights;Gold Stock.
6.Overal Balance
Function of Balance of Payments
A country's balance of payments is very important to investors, business
managers,consumers and government officials because it influences, and is
influenced by, other key macroeconomic variables such as GNP,employment,
price levels,exchage rates and interest rates.
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