BALANCE OF PAYMENT

Balance of Payment

Balance of Payment

The balance of payments registers the international financial position of a country, using a double-entry bookkeeping approach to tabulate the market value of the transactions in goods, services, and financial assets between the country's residents and the residents of the rest of the world. Like gross domestic product (GDP), the balance of payments encompasses transactions in goods and services produced during the year, but, unlike the GDP, the balance also encompasses transactions in assets. In addition to categorizing international transactions as debits or credits, the balance of payments separates private transactions in goods and services into the current account and transactions in assets into the capital account. Official government transactions, undertaken to affect the exchange rate, typically separated from private transactions in balance of payments accounting

While nations had been aware of the relationship between their exports and imports since they first coalesced into discernable entities and began to trade, in History of Economic Analysis (1954), Joseph Schumpeter likens the conceptualization of the balance of payments to an idea that vaguely known for centuries without being fully understood. Schumpeter credits Antonio Serra with having the first “clear conception” of the balance of payments in 1613. While Serra recognized and understood many of the mercantilist ideas, according to Schumpeter, his “most important point” was an understanding of the connection between a country's balance of payments position and its domestic economic situation. Schumpeter also mentions Thomas Mun (1571-1641) and other mercantilists as having an understanding of the balance of payments, notwithstanding their misapplication of its principles to trade policy.

Classifications Used in Balance of Payments Accounting

The balance of payments categorizes international transactions along several interrelated lines. First, any transaction on the balance of payments is either a credit or a debit. A transaction, that involves a payment received from foreign residents, due to the international sales of goods, services, or assets by state residents, is a credit on a country's balance of payments; a transaction that involves a payment to foreign residents is a debit. Second, the balance of payments classifies international transactions as either autonomous or accommodating.

An autonomous transaction undertaken independently of any other international transaction and gives rise to an accommodating transaction. Finally, the balance of payments accounts decompose international transactions into current account transactions, which represent trade in currently produced goods and services and capital account transactions, which represent trade in assets.

Credits and Debits

As a result of the double-entry bookkeeping approach, every transaction appears on the balance of payments as either a credit or a debit. A transaction, that involves a, payment received from foreign residents, due to the international sales of goods, services, or assets by state residents, is a credit on a country's balance of payments. For example, when a U.S. firm exports a product and receives a payment from a foreign resident, the value of the product appears on the U.S. balance of payments as a credit, with an encouraging sign, on the balance of payments ...