Balance of payments

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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.

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.

Contents

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 Flag of People's Republic of China People's Republic of China 371.833
2 Flag of Germany Germany 252.501
3 Flag of Japan Japan 210.967
4 Flag of Saudi Arabia Saudi Arabia 95.762
5 Flag of Russia Russia 76.163
6 Flag of Switzerland Switzerland 70.797
7 Flag of Norway Norway 59.983
8 Flag of Netherlands The Netherlands 52.522
9 Flag of Kuwait Kuwait 48.039
10 Flag of Singapore Singapore 39.157
11 Flag of United Arab Emirates United Arab Emirates 39.113
12 Flag of Sweden Sweden 38.797
13 Flag of Republic of China Taiwan 32.979
14 Flag of Algeria Algeria 30.600
15 Flag of Malaysia Malaysia 29.181
16 Flag of Iran Iran 28.776
17 Flag of Hong Kong Hong Kong 28.038
18 Flag of Libya Libya 23.786
19 Flag of Qatar Qatar 21.374
20 Flag of Venezuela Venezuela 20.001
21 Flag of Thailand Thailand 15.765
22 Flag of Canada Canada 12.726
23 Flag of Austria Austria 12.012
24 Flag of Finland Finland 11.268
25 Flag of Argentina Argentina 11.072
26 Flag of Indonesia Indonesia 11.010
27 Flag of Belgium Belgium 9.648
28 Flag of Azerbaijan Azerbaijan 9.019
29 Flag of Chile Chile 7.200
30 Flag of Angola Angola 6.936
31 Flag of Philippines Philippines 6.351
32 Flag of Brunei Brunei 5.990
33 Flag of South Korea South Korea 5.954
34 Flag of Trinidad and Tobago Trinidad and Tobago 5.380
35 Flag of Israel Israel 5.197
36 Flag of Luxembourg Luxembourg 4.893
37 Flag of Uzbekistan Uzbekistan 4.267
38 Flag of Turkmenistan Turkmenistan 4.037
39 Flag of Denmark Denmark 3.512
40 Flag of Nigeria Nigeria 3.466
41 Flag of Oman Oman 3.222
42 Flag of Bahrain Bahrain 2.906
43 Flag of Botswana Botswana 1.974
44 Flag of Egypt Egypt 1.862
45 Flag of Bolivia Bolivia 1.741
46 Flag of Gabon Gabon 1.719
47 Flag of Brazil Brazil 1.712
48 Flag of Peru Peru 1.515
49 Flag of Namibia Namibia 1.356
50 Flag of East Timor Timor-Leste 1.161
51 Flag of Ecuador Ecuador 1.064
52 Flag of Myanmar Myanmar 0.917
53 Flag of Bangladesh Bangladesh 0.780
54 Flag of Equatorial Guinea Equatorial Guinea 0.541
55 Flag of Papua New Guinea Papua New Guinea 0.259
56 Flag of Paraguay Paraguay 0.227
57 Flag of Bhutan Bhutan 0.132
58 Flag of Chad Chad 0.116
59 Flag of Mongolia Mongolia 0.098
60 Flag of Afghanistan Afghanistan 0.081
61 Flag of Suriname Suriname 0.071
62 Flag of Lesotho Lesotho 0.058
63 Flag of Nepal Nepal 0.050
64 Flag of Kyrgyzstan Kyrgyzstan -0.006
65 Flag of Guinea-Bissau Guinea-Bissau -0.008
66 Flag of Solomon Islands Solomon Islands -0.010
67 Flag of Kiribati Kiribati -0.021
68 Flag of Tonga Tonga -0.025
69 Flag of Samoa Samoa -0.029
70 Flag of Comoros Comoros -0.031
71 Flag of Swaziland Swaziland -0.041
72 Flag of São Tomé and Príncipe São Tomé and Príncipe -0.044
73 Flag of Eritrea Eritrea -0.049
74 Flag of Vanuatu Vanuatu -0.049
75 Flag of Belize Belize -0.054
76 Flag of Sierra Leone Sierra Leone -0.063
77 Flag of Haiti Haiti -0.066
78 Flag of Malawi Malawi -0.074
79 Flag of Central African Republic Central African Republic -0.075
80 Flag of Dominica Dominica -0.079
81 Flag of The Gambia Gambia -0.080
82 Flag of Guinea Guinea -0.083
83 Flag of Morocco Morocco -0.099
84 Flag of Cape Verde Cape Verde -0.132
85 Flag of Liberia Liberia -0.137
86 Flag of Côte d'Ivoire Côte d'Ivoire -0.146
87 Flag of Saint Vincent and the Grenadines Saint Vincent and the Grenadines -0.147
88 Flag of Saint Kitts and Nevis Saint Kitts and Nevis -0.150
89 Flag of Burundi Burundi -0.156
90 Flag of Togo Togo -0.160
91 Flag of Zimbabwe Zimbabwe -0.165
92 Flag of Rwanda Rwanda -0.168
93 Flag of Uruguay Uruguay -0.186
94 Flag of Democratic Republic of the Congo Democratic Republic of the Congo -0.191
95 Flag of Guyana Guyana -0.195
96 Flag of Grenada Grenada -0.197
97 Flag of Antigua and Barbuda Antigua and Barbuda -0.211
98 Flag of Djibouti Djibouti -0.211
99 Flag of Republic of Macedonia Macedonia -0.234
100 Flag of Barbados Barbados -0.245
101 Flag of Seychelles Seychelles -0.263
102 Flag of Saint Lucia Saint Lucia -0.280
103 Flag of Cambodia Cambodia -0.313
104 Flag of Niger Niger -0.321
105 Flag of Mauritania Mauritania -0.321
106 Flag of Uganda Uganda -0.331
107 Flag of Benin Benin -0.372
108 Flag of Cameroon Cameroon -0.383
109 Flag of Malta Malta -0.403
110 Flag of Tajikistan Tajikistan -0.414
111 Flag of Maldives Maldives -0.476
112 Flag of Mali Mali -0.502
113 Flag of Fiji Fiji -0.515
114 Flag of Mauritius Mauritius -0.553
115 Flag of Burkina Faso Burkina Faso -0.560
116 Flag of Syria Syria -0.561
117 Flag of Armenia Armenia -0.591
118 Flag of Laos Laos -0.711
119 Flag of Moldova Moldova -0.747
120 Flag of Mozambique Mozambique -0.768
121 Flag of Zambia Zambia -0.810
122 Flag of Kenya Kenya -0.825
123 Flag of Ethiopia Ethiopia -0.868
124 Flag of Tunisia Tunisia -0.925
125 Flag of Albania Albania -0.994
126 Flag of Nicaragua Nicaragua -1.047
127 Flag of Madagascar Madagascar -1.070
128 Flag of El Salvador El Salvador -1.119
129 Flag of Senegal Senegal -1.161
130 Flag of Honduras Honduras -1.228
131 Flag of Yemen Yemen -1.328
132 Flag of Sri Lanka Sri Lanka -1.370
133 Flag of Montenegro Montenegro -1.381
134 Flag of The Bahamas Bahamas -1.440
135 Flag of Republic of the Congo Republic of the Congo -1.479
136 Flag of Tanzania Tanzania -1.496
137 Flag of Costa Rica Costa Rica -1.519
138 Flag of Panama Panama -1.571
139 Flag of Ghana Ghana -1.652
140 Flag of Guatemala Guatemala -1.685
141 Flag of Jamaica Jamaica -1.850
142 Flag of Bosnia and Herzegovina Bosnia and Herzegovina -1.920
143 Flag of Georgia (country) Georgia -2.045
144 Flag of Cyprus Cyprus -2.063
145 Flag of Dominican Republic Dominican Republic -2.231
146 Flag of Slovenia Slovenia -2.250
147 Flag of Jordan Jordan -2.778
148 Flag of Iceland Iceland -2.952
149 Flag of Belarus Belarus -3.060
150 Flag of Czech Republic Czech Republic -3.085
151 Flag of Lebanon Lebanon -3.129
152 Flag of Estonia Estonia -3.776
153 Flag of Slovakia Slovakia -4.070
154 Flag of Croatia Croatia -4.410
155 Flag of Ukraine Ukraine -5.272
156 Flag of Lithuania Lithuania -5.692
157 Flag of Sudan Sudan -5.812
158 Flag of Mexico Mexico -5.813
159 Flag of Colombia Colombia -5.862
160 Flag of Latvia Latvia -6.231
161 Flag of Serbia Serbia -6.334
162 Flag of Pakistan Pakistan -6.878
163 Flag of Hungary Hungary -6.932
164 Flag of Vietnam Vietnam -6.992
165 Flag of Kazakhstan Kazakhstan -7.184
166 Flag of Bulgaria Bulgaria -8.464
167 Flag of New Zealand New Zealand -10.557
168 Flag of Republic of Ireland Ireland -14.120
169 Flag of India India -15.494
170 Flag of Poland Poland -15.905
171 Flag of South Africa South Africa -20.557
172 Flag of Portugal Portugal -21.987
173 Flag of Romania Romania -23.234
174 Flag of France France -30.588
175 Flag of Turkey Turkey -37.684
176 Flag of Greece Greece -44.218
177 Flag of Italy Italy -52.725
178 Flag of Australia Australia -56.342
179 Flag of United Kingdom United Kingdom -105.224
180 Flag of Spain Spain -145.141
181 Flag of United States 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

  1. Fedpoint: "Balance of Payments," Federal Reserve Bank of New York, Retrieved May 30, 2009.
  2. OECD Glossary of Statistical Terms oecd.org. Retrieved May 30, 2009.
  3. Fedpoint
  4. IMF, 2007, "Balance of Payments Statistics Yearbook 2007," Part 2, Table A2
  5. 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.
  6. Norman S. Fieleke, October 1996, Federal Reserve Bank of Boston, What is the Balance of Payments?, Retrieved May 30, 2009.
  7. International Monetary Fund, 1996 Balance of Payments Textbook. (IMF, Washington, DC), page 3
  8. Fedpoints
  9. Fedpoints
  10. IMF Balance of Payments Textbook, 5
  11. 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.
  12. "Balance of Payments," June 2008, Bangko Sentral ng Pilipinas (Central Bank of the Republic of the Philippines), Retrieved May 30, 2009.
  13. "Balance of Payment Policies," Biz.Ed. Retrieved May 30, 2009.
  14. Current account balance, U.S. dollars, Billions from IMF World Economic Outlook Database, October 2008
  15. Current account balance, U.S. dollars, Billions from IMF World Economic Outlook Database, October 2008

References

External Links

All links retrieved December 8, 2012.


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