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Rules of thumb for recording and classifying transactions in the balance of payments.

Every international transaction must have two entries:

• on the credit side (+)

• on the debit side (-)

Transactions that result in financial receipts (payments) from abroad are credits (if you sell something, you are paid for it, therefore the sell transaction is recorded as credit, with plus)

Transactions that result in payments to abroad are debits (if you buy something, you have

to pay for it, so buy transaction is recorded with minus)

Exports result in a credit entry in the current account and an analogous debit entry in the financial account.

Imports result in a debit entry in the current account and an analogous credit entry in the financial account.

A reduction in nation’s liabilities (=debts) to foreigners is a capital outflow, and is entered

as debit in the financial account. Increase in the liabilities is a capital inflow (foreigners give a nation ‘new money’) and is recorded as credit in the financial account.

Decreases in country’s assets (real, financial, etc) due to their transfer to the rest of the world (they get sold), and increases in countries debt to the rest of the world, are sources of the foreign exchange (of money), and are recorded as credits (+) in the financial account.

Increases in country’s assets acquired (bought) from the rest of the world, and decreases

in debts, are uses of the foreign exchange, and are recorded as debits (-)in the financial

account.

Payments by foreigners for our exports to them are recorded in the financial account with a minus sign. Usually, they will be regarded as short-term transactions, and therefore assigned to entry 6b – portfolio investment transactions. Imagine that a domestic firm or its foreign subsidiary or a sales representative has a bank account in a foreign country. This firm sells something to a person or a firm abroad (our exports), which in turn deposits a payment in the foreign account of the domestic firm. It means that the domestic exporting firm holds a foreign asset (a deposit in a bank abroad). The opposite holds if we pay for our imports.

Reduction in our debts to abroad is recorded with a minus (we repay our debt, therefore we ‘lose’ some money = money outflow). Usually it would be recorded under portfolio investment transactions, 7b, since it represents a decrease in the amount of our assets owned by foreigners. Remember, a debt is an asset to the person who lends the money away, and a liability to the person who borrows the money.

If the foreigners repay their debts, it is recorded under entry 6b, since we decrease our holdings of foreign assets.

Debt forgiveness enters the capital account.

Foreign aid is recorded under unilateral transfers, since it represents a direct source or use of income. If we help other countries, the sums are recorded as debits (-), if our citizens receive such money from abroad, it is recorded as credits (+).

CURRENT ACCOUNT

+

-

1.

Exports

   

1a. Goods

1b. Services (includes also income from tourism, insurance, banking, research, etc.)

1c. Income receipts (income generated by the services of our capital ‘employed’ abroad)

2.

Imports

2a. Goods

2b. Services (includes also tourism spending, insurance, banking, research, etc.)

2c. Income payments (income generated by the services of foreign capital ‘employed’ in our country)

3.

Net unilateral transfers (foreign aid, money sent to the relatives abroad, scholarships for foreigners, etc.)

4.

Balance on the current account = 1 + 2 + 3

5.

CAPITAL ACCOUNT

   

(NONRESERVE) FINANCIAL ACCOUNT

   

6.

Our holdings of assets abroad = purchases of foreign assets, increase = (-), excluding official reserves, (assets of a

   

foreign origin or location owned by the residents of our country.) Includes payments by foreigners for our exports.

 

6a. Direct investment transactions (long term)

6b. Portfolio investment transactions (short term)

7.

Foreigners’ assets holdings in our country = sales of our assets to foreigners, increase = (+), excluding official reserves,

(our assets owned by foreigners.) Includes our payments to foreigners for our imports.

 

7a. Direct investment transactions (long term)

7b. Portfolio investment transactions (short term)

8. Balance on non-reserve financial account = 6 + 7

9. Statistical discrepancy

   

10.

Official settlements balance = 4 + 5 + 8 + 9

   

OFFICIAL RESERVE TRANSACTIONS

   

11. Our official reserves abroad (purchases of foreign assets), increase = (-)

   

12. Our assets used as official reserves by other countries (sales of our assets to foreign reserves holders), increase=(+)

13. Balance of official reserve transactions = 11 + 12