Balance of payments is a statistical report that systematically provides summary data on the foreign economic transactions of a given country with other countries of the world for a certain period of time.
At the highest possible level of generalization, the balance of payments consists of:
flows of real resources – exports and imports of goods and services; their respective flows of financial resources, which are payment for the acquisition or payment for the sale of the financial resources concerned.
As can be seen from the definition, for a correct understanding of the balance of payments, it is necessary, first of all, to determine the basic principles of its construction. In accordance with the general methodology for compiling the balance of payments developed for IMF member countries, the following basic principles are used in the construction of the balance of payments:
Double entry system. Since the balance of payments is a balance sheet identity, each transaction reflected therein must be represented by two entries that have the same value. One of these entries is designated as a credit with a plus sign, the other as a debit with a minus sign. Under the loan, operations leading to a reduction in the international assets of a given country or to an increase in its external liabilities and liabilities are recorded under the items of flows of financial resources. For assets, regardless of whether they are real or financial, a positive number in credit means a decrease in their inventories, whereas a negative number in the debit means their increase. By debit, transactions leading to an increase in the international assets of residents or to a reduction in its external liabilities are recorded under the items of financial flows. In other words, regardless of whether the flows are real or financial, a positive number (credit) means a decrease in their stock, whereas a negative number (debit) reflects their increase. Accordingly, for liabilities, a positive value characterizes an increase in the stock, and a negative value – a decrease (Example 2.1). The economic territory of a country is a geographical territory under the jurisdiction of the government of a given country, within which labor, goods and capital can move freely. In landlocked countries, islands are also included in the concept of economic territory if their economies are subject to the same monetary and fiscal authorities as the mainland. The economic territory includes territorial waters within which the country has the exclusive right to fish and extract natural resources, as well as territorial enclaves located in other countries, such as free economic zones. Thus, the border of the economic territory does not always coincide with the state border.
EXAMPLE 2.1.
For example, the exporter received currency for his goods. In this case, one record registers the export of goods, the other – an increase in the foreign exchange assets of banks (on the foreign currency account of the exporter) by the same amount. At the same time, the import of non-residents’ equipment to pay for the authorized capital of the enterprise established in the territory of the national economy will be registered by debit as import, and by credit – as direct investments in the national economy.
In addition to the above, the balance of payments also includes so-called transfer operations that do not entail adequate compensation in one form or another (i.e. in the form of goods, services or assets). In this case, one side of the transaction will be automatically recorded in the trade balance, and the compensation record will be reflected in the transfer column.
For example, humanitarian aid received by a country will be reflected in the balance of payments by debit (as imports) in the trade balance, while simultaneously posting the credit in the item of current transfers.
Residents—nonresidents. A resident is a household or legal entities (corporations, branches of foreign firms, non-profit organizations, government bodies) that have been in the country for more than a year and have a center of their economic interest in it. It is considered that a natural or legal person has the center of his economic interest in a given country if he is located on its economic territory, conducts economic activities on it and carries out economic operations for at least a year. The right to own property (land, structures, etc.) is sufficient to consider that this person has a center of economic interest in a given country. If an individual has been outside the economic territory of the country for more than a year, he ceases to be considered a resident. Tourists, seasonal workers, border workers, personnel of international organizations, local staff of foreign embassies, ship crews and aircraft crews continue to be considered residents of the country to which they are sent. Market price. To record transactions in the balance of payments, market prices are used – the amount of money that the buyer is willing to voluntarily pay for the goods purchased from the seller, who is ready, in turn, to voluntarily sell him this product, i.e. this is the price at which real transactions are concluded between an independent buyer and an independent seller. The market price in a particular transaction, determined in this way, must be distinguished from stock quotes, world market prices, current prices and any other generalized price indicators. There may be cases when there is no market price of the transaction: with barter exchange of goods, operations between divisions of the same corporation, etc. In these cases, such operations are estimated in prices fixed for similar transactions. Time of registration. Since each transaction in the balance of payments should be represented by two records, both of these records should ideally be made simultaneously, at the moment when economic values are created, transformed, exchanged, transferred or liquidated. The emergence of financial claims and obligations is usually associated with the transfer of ownership of any material values from one party to the transaction to another. If the moment of transfer of ownership is not obvious, then it is considered the moment of the corresponding accounting entry in the accounting of the buyer and seller. Accounting unit. In preparing the balance of payments, countries should use the unit of account that they use in domestic accounting and accounting. To convert data into dollars, it is recommended to use the exchange rate of the national currency to the dollar, which was actually in force in the market on the date of compilation of the balance of payments. If several exchange rates are used for settlements on foreign economic operations, then the recalculation of the balance of payments data is carried out at a weighted average rate. In any case, the same exchange rate should be used to recalculate each component of the balance of payments.