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.

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.

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.

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, but as of 2006 had a large account deficit. 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.]."

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. 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."

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."

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."

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. 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."

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.

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.

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). 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

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

References

ISBN 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 August 26, 2023.

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

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