1.1 International transactions: the balance of pay...
The balance of payments is the record of the economic and financial flows that take place over a specified time period between residents and non-residents of a given country.The time period is arbitrary, but it is common practice to supply balance of payments data on a monthly, quarterly and yearly basis.The residents of a country comprise the central government, individuals, private non-profit bodies serving individuals, and enterprises, all defined in terms of their residential relationship to the territory of that economy.Flows refer to income and expenditure or changes at levels of outstanding assets and liabilities.They are recorded in a double entry system of credits and debits or sources and uses.
The best way to understand this definition is via some simple examples, but first we have to have some general idea of what the balance of payments includes.Table 1.1 shows a shorthand presentation of how the IMF portrays the balance of payments.It is divided into two major accounts, the current account and the capital account.Each general account is then subdivided into categories such as exports, imports, direct investment and portfolio investment.When necessary, more details are available.
Table 1.1 Standard components of the balance of payments
In order to make comparisons between different economies, a standardized method for compiling the accounts is necessary.The accepted practice is that the elements of both accounts should be recorded at market prices where possible.Market prices mean the amount of money that a willing buyer pays to acquire something from a willing seller, when the buyer and the seller are independent and when such an exchange is motivated only by commercial considerations.In this context, each transaction is priced individually according to the contract terms specific to that transaction.It is therefore conceivable that separate transactions, though identical in every way, could have different market prices.While most transactions lend themselves to this notion of a market price, many do not, such as barters, tax payments, transfers between affiliated enterprises and gifts.In such cases it is necessary to estimate their actual market values respectively.
With these general definitions in mind, we can move on to some concrete examples of how the balance of payments accounting works.