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What is the Balance of Payments?

What is the Balance of Payments?

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Published by: pololambros on Jan 24, 2010
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What Is the Balance of Payments?
Norman S. FielekeVice President and EconomistFederal Reserve Bank of BostonFederal Reserve Bank of BostonJuly 1976
Revised August 1985 and October 1996
 
Hypothetical Transactions between U.S. Residents andForeign Residents (In millions of dollars)
Line Account Debits CreditsExcessofDebits(
)orCredits(
)
1 Exports of goods and services, and incomereceived 60
602 Goods (1) 49
493 Services (1) 1
14 Income on U.S. investments abroad (3) 10
105 Importsof goodsand services, and income paid 70
706 Goods (4) 65
657 Services (5) 5
58 Income on foreign investments in U.S.9 Unilateral transfers (6) 1
110 Changes in U.S. claims on foreigners
1
100 61
3911 U.S. official reserve assets12 Gold13 Foreign currency balances14 Other15 Other U.S. Government claims16 U.S. private claims17 Direct investments18 Other U.S. private ‘‘long-term’’ claims (7) 40
4019 U.S. private short-term claims (1) 50 (3) 10 (2) 50 (4) 10(6) 1
120 Changes in foreign claims on U.S. (i.e., in U.S.liabilities to foreign residents)
2
75 125
5021 Foreign ofcial claims (8) 25
2522 Foreign private short-term claims (2) 50 (8) 25 (4) 55 (5) 5(7) 40
2523 Other24 Total 246 246 0Memoranda:25 Balance on goodsand services(lines2, 3, 6, & 7)
2026 Balance on current account (lines 1, 5, & 9)
1127 Transactionsin U.S. official reserve assetsand inforeign official assetsin the United States(lines12, 13, 14, & 21)
25
1
Including U.S. real property abroad.
2
Including foreign real property in the United States.
 
A Short Definition
A country’s balance of payments is commonly defined as the recordof transactions between its residents and foreign residents over a specifiedperiod. Each transaction is recorded in accordance with the principles ofdouble-entry bookkeeping, meaning that the amount involved is enteredon each of the two sides of the balance-of-payments accounts. Conse-quently, the sums of the two sides of the complete balance-of-paymentsaccounts should always be the same, and in this sense the balance ofpayments always balances.However, there isno bookkeeping requirement that the sumsof thetwo sidesof a
selected number 
of balance-of-paymentsaccountsshould bethe same, and it happens that the (im)balances shown by certain combina-tions of accounts are of considerable interest to analysts and governmentofficials. It is these balances that are often referred to as “surplusesordeficitsin the balance of payments.Thismonograph explainshow such measuresof balance are derivedand presents standard interpretations of them. Full understanding requiresa grasp of elementary balance-of-paymentsaccounting principles, so theseprinciples are outlined and illustrated in the first two sections.
Recording of Transactions: General Principles
The double-entry bookkeeping used in accounting for the balanceof payments is similar to that used by business firms in accounting for theirtransactions. In ordinary business accounting the amount of each transac-tion isrecorded both asa debit and a credit, and the sum of all debit entriesmust, therefore, equal the sum of all credit entries. Furthermore, in businessaccounting it is recognized that the total value of the assets employed bythe 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 claimsagainst the assetsare called the liabilitiesof the firm. (Assetsof the firm not
3

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