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Introduction to Balance of Payments (BoP) Accounting | Census and St...

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Introduction to Balance of Payments (BoP) Accounting The BoP Account The balance of payments (BoP) is a statistical statement that systematically summarizes, for a specific period (typically a year or quarter), the economic transactions of an economy with the rest of the world. It covers (a) all the goods, services, factor income and current transfers an economy receives from or provides to the rest of the world; and (b) capital transfers and changes in an economy's external financial claims and liabilities. Double-entry Accounting System The principle of double-entry accounting is used in compiling BoP statement where every recorded transaction is represented by two entries, a credit and a debit, with equal values but in opposite sign, so that the resulting sum of the credit entries should always be in balance with the debit entries. In the BoP, the term credit is used to denote a reduction in assets or an increase in liabilities, and the term debit is used to denote a reduction in liabilities or an increase in assets. Such usage has been supplemented by the rule that every recording of a debit movement shall be matched by the recording of a credit movement and vice versa. For example, if a resident of the HKSAR sells goods to a non-resident (i.e. exports) and receives foreign currency in return, the two related BoP entries are: goods exported (a credit) and an increase in financial claim on non-resident (a debit). If a bank in the HKSAR sets up a branch office in Canada, a debit entry have to be made under Direct investment of the Financial Account to reflect an increase of direct investment abroad and an offsetting credit entry under Other Investment: Assets: Currency and deposits to reflect the spending of foreign currencies for setting up the overseas branch office by the local bank. The double-entry accounting conventions used for compiling a BoP Account are summarized in the following table: Credit Exports of goods and services Income receivable from abroad Transfers from abroad Increases in external liabilities Decreases in external assets Residents of an Economy In BoP compilation, it is necessary to distinguish residents of an economy from non-residents. Residents of an economy include individuals and organizations. Conceptually, an institutional unit is a resident unit of an economy when its centre of economic interest is in the economic territory of the economy. The economic territory of an economy consists of the geographic territory administered by the government within which persons, goods and capital circulate freely. According to international statistical standards, for individuals, residents refer to those who normally stay in the economic territory of the economy, irrespective of their nationality; and for organizations, residents refer to those which ordinarily operate in the economic territory. For example, a foreign domestic helper working in Hong Kong is regarded as a resident of Hong Kong. A branch of a foreign bank operating in Hong Kong is defined as a resident organization. Classification and Standard Components of BoP As stipulated in the BPM5, the standard component of a complete BoP Account comprises two broad accounts: (a) Current Account; and (b) Capital and Financial Account. Current Account The Current Account measures flow of resources including exports and imports of goods and services, income receivable and payable abroad, and current transfers from and to abroad. Current transfers are transactions in which residents of an economy provides real or financial resources that are likely to be consumed immediately or shortly, to residents of other economies without receiving equivalent values in return. Transfers, unlike other elements of the BoP, are one-way transactions for which there is no quid pro quo. Current transfers take the form for example of remittances, donations, official assistance and pensions. Debit Imports of goods and services Income payable abroad Transfers to abroad Decreases in external liabilities Increases in external assets 29/5/2011

Introduction to Balance of Payments (BoP) Accounting | Census and St... Page 2 of 2

Capital and Financial Account The Capital and Financial Account records transactions in capital, including capital transfers, and in claims on, and liabilities to, non-residents. Capital Account The Capital Account measures external transactions in capital transfers and in non-produced, non-financial assets (such as patents and copyright). Capital transfers include migrant transfers and debt forgiveness of the government. Financial Account The Financial Account basically shows how an economy's external transactions are financed. Transactions in this account are classified into direct investment, portfolio investment, financial derivatives, other investment and reserve assets. Direct investment refers to external investment in which an investor of an economy acquires a lasting interest and a degree of influence or control over the management of an enterprise located in another economy. Portfolio investment refers to external investment in equities and debt securities, except those related to direct investment and reserve assets. Financial derivatives refers to external investment in financial derivatives. Other investment is a residual category that includes all external investment not considered as direct investment, portfolio investment, financial derivatives, or reserve assets. Examples are short-term and long-term non-marketable loans, deposits, financial leases and trade credits. Reserve assets consist of foreign currency assets that are readily available to and controlled by the monetary authority of an economy (in the case of the HKSAR, the Hong Kong Monetary Authority) for directly financing payment imbalances and for indirectly regulating the magnitude of such imbalances through intervention in the exchange markets to defend and support the exchange rate of the domestic currency. Examples of BoP Transactions The main components of a complete BoP Account, the presentation of which follows internationally adopted definitions and classifications published in the Balance of Payments Manual (Fifth edition), or BPM5, of the International Monetary Fund (IMF) are set out in the Annex. The coverage of each component and examples of BoP transactions pertaining to individual components are given in the Annex to illustrate the nature of transactions involved. January 2001


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