108 Chapter 5 ■ National and International Accounts

The previous expression shows that each transaction in the BOP must involve
a BOP credit and a BOP debit so that the identity is satisfied.
BOP Credits:

Current account (CA) Exports of goods and services ( EX)

Exports of factor services ( EXFS)
Unilateral transfers received ( UTIN)
Capital account (KA) Capital transfers received ( KAIN)
Financial account (FA) Exports of home and foreign assets ( EXHA, EXFA)

BOP Debits:

Current account (CA) Imports of goods and services (–IM)

Imports of factor services (–IMFS)
Unilateral transfers given (–UTOUT)
Capital account (KA) Capital transfers given (–KAOUT)
Financial account (FA) Imports of home and foreign assets (–IMHA, – IMFA)

The balance of payments sums to zero, which highlights a key accounting les-
son. Every market transaction involves two parties. If party A engages in a
transaction with party B, A receives from B an item of given value. In return,
B receives from A an item of equal value.
Examples: The Double-Entry Principle in the Balance of Payments The
following examples differ from the ones in the textbook. This is to provide
additional examples for lectures. They mirror those in the textbook, but are
based on the perspective of the United States as the home country.
1. Suppose an American, David, is visiting Milan on business selling mes-
senger bags to merchants. He spends a total of $800 (€500) for his ho-
tel. David pays for his hotel using his Mastercard (issued by a U. S.
bank). The Milanese hotel now has a claim against Mastercard, so there
is an increase in home assets owned by foreigners. The entries for this
transaction affect the current account and the financial account:

CA: Hotel services in Milan –IM: –$800

FA: Hotel’s claim on Mastercard EXHA: $800
2. In Milan, David meets with an Italian business associate, Francesco.
Francesco plans to purchase a dozen of David’s messenger bags (worth
$120 each) for a bicycle messenger service he owns. He pays David the
$1,440 using a checking account with Banca Intesa (an Italian bank).
The messenger bags are a good exported from the United States to Italy.
The funds drawn on an Intesa checking account represent the import of
foreign assets into the United States from Italy.
CA: Messenger bags as good exported to Italy EX: $1,440
FA: David’s claim on an Intesa bank account –IMFA: –$1,440
3. Later that evening, David meets a friend of his from college, Margrit,
who is on vacation in Milan from Switzerland. He learns that Margrit
has gone into business as a watchmaker. Wanting to try David’s messen-
ger bag for her own use, Margrit offers to exchange one watch, worth
 Chapter 5 ■ National and International Accounts 109

$150, for one of David’s bags worth the same. The entries for this trans-
action affect only the current account because no financial assets are ex-
changed.
CA: U. S. messenger bags exported to Switzerland EX: $150
CA: Swiss watch imported to the United States –IM: –$150
4. Before going to sleep that evening, David decides to watch a soccer
match between the home Italian team versus an English team. He sees
that the English team is sponsored by Emirates, a luxury airline based in
the United Arab Emirates. After reviewing Emirates’ annual report, he
decides to purchase $5,000 in Emirates stock, drawing on funds from a
U. S. bank account.
FA: David’s shares in Emirates –IMFA: –$5,000
FA: Emirates’ claim on a U. S. bank account EXHA: $5,000
5. The next morning, David learns of a hurricane that hit the Gulf of Mex-
ico, destroying buildings in Louisiana and Mississippi. A German firm
donates emergency cell phones and Internet satellite communications
worth $40,000 for households and businesses affected by the disaster. In
the U. S. current account, this is recorded as an import and a unilateral
transfer into the United States.
CA: German cell phones and equipment –IM: –$40,000
sent to the United States
CA: German firm’s private charitable gift UTIN: $40,000
6. In response to the hurricane, South Korea pledges to donate $3. 8 mil-
lion in cash (U. S. dollars) toward the relief effort. This decreases U. S.
assets owned abroad (in South Korea), which are returned to the United
States as a gift (on the capital account).
FA: Decrease in U. S. external liabilities –IMHA: –$3. 8 million
KA: South Korean grant for hurricane relief KAIN: $3. 8 million
These examples highlight an important lesson from the balance of payments:
When a transaction appears as a credit on the BOP account, it must generate
a corresponding debt elsewhere in the BOP account. Similarly, every debit
must have a corresponding credit.

Understanding the Data for the Balance of Payments Accounts

This section shows the U. S. BOP for 2009. The accounts are listed accord-
ing to the order given previously: CA, KA, FA, and the statistical discrepancy.
A country with a current account surplus is a (net) lender; one with a
current account deficit is a (net) borrower.
CA 0; KA FA 0