1. BALANCE OF PAYMENTS

2. Balance of Payments
Countries, like businesses, need to keep a record of all economic transactions that occur.
By combining all of the separate records into a single report, an idea can be formed as to the state of the economy.
In many countries, this report is known as the ‘Balance of Payments’.

3. Balance of Payments
A country’s balance of payments is a summary of all economic transactions that occur between domestic entities and foreign entities.
Entities includes households, firms and the government.
The balance of payments is measured over a given time period, usually one year.

4. Economic Transactions
The economic transactions included in a balance of payments include:
- the sale or purchase of physical goods (e.g. computers)
- services (e.g. tourism)
- transactions involving real or financial assets (e.g. investments)
- transfer payments (e.g. foreign aid)

5. Debits and Credits
An example of a debit transaction for Country X would be the purchase of new military equipment from Country Y - money has flowed out of Country X’s economy to a foreign entity.
An example of a credit transaction would be the purchase of wool from Country X exporter - money has been injected into Country X’s economy from a foreign entity.

6. Account Types
There are many separate accounts which make up the balance of payments.
These separate accounts come under four main headings:
- the current account
- the capital account
- the financial account
- net errors and omissions

7. The Current Account
The current account contains several key accounts, including:
- the merchandise trade account
- the services account
- income account
- transfer account

8. Merchandise Trade Account
This account records all transactions involving physical goods, e.g. televisions, cars and food.
Exports of a country’s goods are recorded as a credit in the balance of payments.
Imports of foreign goods are recorded as debits in the balance of payments.
The net merchandise trade balance is the total value of all goods exported minus the total value of all goods imported into a country.

9. Services Account
This account records all transactions involving services rendered, such as tourism, banking and legal consultation.
Services performed by residents to foreigners are a credit on the balance of payments.
Services performed by foreigners for residents are debits on the balance of payments.
The services balance is the total value of services performed by residents minus the value of services performed by foreigners.

10. Balance of Goods and Services (Trade Balance)
The trade balance combines the merchandise trade and services accounts.
Thus, the trade balance is simply the total value of all goods and services exported by a country minus the total value of all goods and services imported by into a country.

11. Income Account
This account records all income earnt such as wages, salaries and profits.
Income earned by residents from foreigners is a credit on the balance of payments.
Income paid to foreigners by residents are debits on the balance of payments.
The income balance is the total value of all income earned by residents from foreigners minus the total value of all income paid to foreigners by residents.

12. Transfers Account
This account records all transfers such as foreign aid and donations.
Transfers paid by residents to foreigners is a credit on the balance of payments.
Transfers paid to residents from foreigners are debits on the balance of payments.
The transfers balance is the total value of all transfers received by residents from foreigners minus the total value of all transfers paid to foreigners by residents.

13. Current Account Balance
The current account balance is the total value of a country’s balance on goods and services, net income and net transfers.
When the balance is negative it is called a current account deficit - more money flowed out (leakage) than was injected into the economy.
When the balance is positive it is called a current account surplus - more money was injected than was spent overseas by residents.
When the balance is zero it is called a balanced current account.

14. Capital and Financial Accounts
These accounts record all of the physical capital and financial transactions such as shares and bonds.
Transactions where residents receive money from foreigners is recorded as a credit in the balance of payments (e.g. foreign investment).

15. Capital and Financial Accounts
Transactions where residents pay money to foreigners is recorded as a debit in the balance of payments (e.g. profits paid to foreign creditors).

16. Capital and Financial Accounts
The capital account records all capital transactions (eg. Migrant’s funds) and any transactions of non-produced, non-financial assets (eg. Copyrights and patents).

17. Capital and Financial Accounts
The financial account records all transactions associated with changes of ownership of a country’s foreign financial assets and liabilities.
These include foreign investment in a country or investments made abroad by residents, as well as transactions made by monetary authorities (ie. Central Banks or Federal Reserve Banks) in assets such as monetary gold and foreign exchange.

18. Net Errors and Omissions
The double entry bookkeeping system requires that the debits must equal the credits in the balance of payments.
If this is not the case, a residual account called net errors and omissions will offset the difference to ensure that the balance of payments is, in fact, balanced.

19. Current Account Deficits
Many countries have their current accounts in deficit.
This means more money has flowed out of these economies than has been injected into them.
If the trend continues it could be problematic – the economy could start to shrink with foreign investors taking profits out of the country and the Government could be forced to either borrow money or to sell assets to pay off the growing foreign debt.

20. Current Account Deficits
If the debt is private, however, it is up to the individual borrowers to pay back the foreign debt, not the Government.

21. Economics: Notes for Teachers
Balance of Payments
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