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IBP. The International Balance of Payments

How it is built up and what does it show as to economic development

Term Paper 2010 7 Pages

Economics - Macro-economics, general

Excerpt

Introduction

The international balance of payments is, according to the Balance of Payment Manual by the IMF, “a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world.”[1] The first part of this work deals with the basic anatomy of the balance of payments, short BOP. Like every other commercial balance sheet, it follows the principle of double-entry bookkeeping so that net debit and net credit positions are equal. The two main accounts of the BOP, which are further subdivided, are called current and capital account. Further, there is a so called balancing item included into the capital account, which serves as the “equalizer” of the balance. The reader will see that it is an important tool for a country’s central bank.

The second part shows as to what degree certain figures in the balance of payments reveal something about economic development. It is demonstrated that short-term as well as long-term prognoses should always be treated cautiously as the quality of a forecast depends on several factors. Same goes for the interpretation of positions in the balance sheet. However, nowadays the BOP is a widely employed tool to measure transactions between several countries as well as to predict future economic conditions.

Basics

An international balance of payments (BOP) is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include domestic claims to foreign payments as well as foreign liabilities to be paid by domestic debtors, also called foreign exchange.[2] The basic principle upon which the BOP fabricated – as commonly practiced in bookkeeping – is the double-entry accounting system. Every transaction is represented by two entries with equal values but opposite signs, a debit (−) and a credit (+). By convention, certain positions in the BOP are recorded as debits, others as credits. For example, exports, which mean an increase in foreign liabilities or a decrease in asset positions, are treated as positive or surplus items whereas imports, which mean a decrease in foreign liabilities and an increase in assets, are treated as negative or deficit items.

All liabilities and all claims can be aggregated as so called stocks or flows if observed over a longer period of time.[3]

With double-entry bookkeeping, the sum of all credits should in principle be identical to the sum of all debits and the overall balance must equal zero. In this sense, the balance of payments is always in balance. For example, if imports exceed exports, its trade balance will be in deficit, but the debit will have to be counter balanced in other ways – such as by funds earned from its foreign investments by running down reserves or by receiving loan payments from other countries.

The BOP summarizes international transactions for a specific period, usually a year, and its figures are represented in domestic currency.

As various transactions are settled in all kinds of currencies, the settlement of the domestic currency as unit of account is troublesome.

A high rate of inflation of the domestic currency for example can make year-to-year comparisons of foreign transactions less meaningful.

The same goes for using a major currency such as the Euro or the Dollar since all currencies in global transactions are subject to fluctuations and are equally misguiding.[4] Therefore, evaluation concerning economic development should be taken carefully and should take the inflation rate into account.

Current and Capital Account

The BOP is divided into two main accounts with several subdivisions to them. Firstly, the current account which is subdivided into trade- and service account, account of revenues and account of current transfers. The trade- and service account lists transactions of goods and services exported and imported. The account of revenues sums up all the expenditures for foreign employees and also the revenues from employees working abroad as well as from investment abroad. The last position in the current account is the account of current transfers which adds up grants without any trade-off such as development aid, contributions to international organizations or subsidies for instance.[5]

The other main account is the capital account which represents all capital movement, that is to say, foreign direct-, portfolio- and other investment as well as transfer positions of intangible nonfinancial assets and rights such as estate and proprietary rights. Foreign direct investment takes place when domestic firms expand into another country. The distinctive feature of this type of capital import is that it involves not only a transfer of resources, but also the acquisition of partial or full control. Multinational firms are the main vehicles through which the bulk of foreign direct investment takes place. It is valued by countries not only because it does not create a debt obligation for the receiving country, but also because it is an important means of capital and labour transfer from abroad. The benefits of such technology transfers may be seen as outweighing the capital flow itself. This explains why it is not only developing and transition economies that are keen to implement policies that attract foreign investment flows, but also industrial countries.[6]

Another form of investment is the portfolio investment. It refers to short-term investment such as the purchase of shares and bonds. Other investment includes trade credits and general borrowing.

[...]


[1] (Fund, 1993)

[2] (The International Balance of Payments (IBP))

[3] (The International Balance of Payments (IBP))

[4] (India)

[5] (The International Balance of Payments (IBP))

[6] (India)

Details

Pages
7
Year
2010
ISBN (eBook)
9783656586142
ISBN (Book)
9783656586111
File size
527 KB
Language
English
Catalog Number
v268045
Institution / College
Berlin School of Economics and Law
Grade
1,7
Tags
IBP Makroökonomie macroeconomics balance of payments imf bop

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Title: IBP. The International Balance of Payments