Balance of Payments

Balance Of Payments

Summary of Balance Of Payments

The sum owed to or by a nation as the result of its international transactions during a given time period, usually one year. The balance of payments is calculated by subtracting the nation’s total payments to foreigners from total income received from foreigners, and includes not only commercial transactions, but gifts to residents, foreign aid, and sales or purchases of reserve assets such as monetary gold. The principal components of the balance of payments are: Balance of Trade account—which consists of the sum total of merchandise exports (receipts) less merchandise imports (outflows). Service transactions—the sum of sales of services (e.g., tourism, insurance, banking, shipping) less purchase of services from foreigners. The product of the balance of trade and service accounts constitutes the balance of goods and services. Transfer Payments—this includes sums received or expended without reciprocation, including foreign aid, remissions by foreign workers to their families at home, and gifts. The balance of goods and services, combined with the net transfer payments account constitute the balance on current account. Capital Transactions Account—which is the product of investment inflows, less investment outflows. The net capital transactions balance, combined with the balance on current account, are the basic balance, also known as the balance on current account and long-term capital transfers. Reserve Transactions Account— represents the net product of a nation’s purchase and sale of international reserves (gold, hard currencies, and SPECIAL DRAWING RIGHTS (read this and related legal terms for further details) issued by the INTERNATIONAL MONETARY FUND (read this and related legal terms for further details). The net reserve transactions balance, when added to the basic balance, constitutes the official settle balance for the nation.

For most countries, the balance of trade is usually the largest single factor in the balance of payment

When a nation’s total income from international transactions exceeds expenditures to foreigners during a given time period, the nation enjoys a “positive”balance of payments, or a balance of payments “surplus”; conversely, when expenditures abroad exceed income from foreigners, the nation suffers a balance of payments “deficit”or a “negative”balance of payments. A shortfall caused by a balance of payments deficit must be offset by borrowing or by transfer of official reserves to creditor nations.

To assist nations suffering short-term or chronic balance of payments difficulties, the International Monetary Fund has established various lending facilities.

(Main Author: William J. Miller)

Balance of Payments and International Trade Economy

In relation to international trade economy, Christopher Mark (1993) provided the following definition of Balance of Payments: The composite record of international transactions –i.e., trading, borrowing, and lending –in which a country is involved during a given time period, such as a calendar year or quarter. The balance of payments includes commercial and government transactions for goods and services, international direct investment and bank transactions, and sales or purchases of foreign currencies (or “official reserves”). The two main components of the balance of payments are thecurrent account and the capital account. A third component –the official settlements balance –records the net increase or decrease in a country’s holdings of official reserves; it bridges any remaining gap between the current account and capital account balances, and is normally very small relative to them.

Balance of Payments Consultations and the GATT Policy Negotiations

In relation to the GATT Policy Negotiations, Christopher Mark (1993) provided the following explanation and/or definition of Balance of Payments Consultations: The GA TT permits countries to levy quantitative restrictions in times of acute deficits in their balance of payments. Countries invoking this provision take pan in balance of payments consultations with other GA TT members to justify the restrictions and specify plans to improve the payments deficit (see Committee on Balance-of-Payments Restrictions, Sec. III).Articles 12 and 18 require such restrictions to be temporary, but often they remain in place for years. (Article 18, providing more flexible and lenient conditions, may only be invoked by LDC members.) The 1979 GA TT Framework Agreement legitimized use of nonquantitative restrictions for balance-of-payments purposes (see import surcharge).

Balance of Payments in International Trade

Meaning of Balance of Payments, according to the Dictionary of International Trade (Global Negotiator): A statistical summary of international transactions. These transactions are defined as the transfer of ownership of something that has economic value in monetary terms from residents of one country to residents of another. The transfer may include goods (tangibles), services (intangibles), income on investment and financial claims on, and liability to, the rest of the world, including changes in a country’s reserve assets held by the central monetary authorities. Many governments and central banks break down the Balance of Payment to its component subtotals, such as balance of trade, balance of services, balance on investment income, balance on transfers or balance of capital (long and short terms).

Concept of Balance of Payments

An introductory definition of Balance of Payments is provided here: net flow of goods, services and financial transactions that takes into account outflows and inflows of money from a state

Resources

See Also

  • Foregin Policy
  • Foreign Affairs

Resources

See Also

  • Public Finance
  • Public Policy
  • Tax Law
  • Financial Regulation

Hierarchical Display of Balance of payments

Finance > Monetary relations
Finance > Monetary economics > Monetary policy > Currency adjustment
Finance > Monetary relations > International finance > External debt
Finance > Monetary relations > International finance > International payment
Finance > Free movement of capital > Free movement of capital > Capital movement
European Union > EU finance > EU financing > EU financial instrument > Support mechanism
International Relations > International affairs > International agreement > Protective clause
European Union > EU finance > EU financing > EU financial instrument > Support mechanism > Balance of payments assistance
Trade > Trade policy > Export policy > Export financing > Compensatory financing
Trade > Trade policy > Trade policy > Regulation of transactions

Balance of payments

Concept of Balance of payments

See the dictionary definition of Balance of payments.

Characteristics of Balance of payments

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Resources

Translation of Balance of payments

Thesaurus of Balance of payments

Finance > Monetary relations > Balance of payments
Finance > Monetary economics > Monetary policy > Currency adjustment > Balance of payments
Finance > Monetary relations > International finance > External debt > Balance of payments
Finance > Monetary relations > International finance > International payment > Balance of payments
Finance > Free movement of capital > Free movement of capital > Capital movement > Balance of payments
European Union > EU finance > EU financing > EU financial instrument > Support mechanism > Balance of payments
International Relations > International affairs > International agreement > Protective clause > Balance of payments
European Union > EU finance > EU financing > EU financial instrument > Support mechanism > Balance of payments assistance > Balance of payments
Trade > Trade policy > Export policy > Export financing > Compensatory financing > Balance of payments
Trade > Trade policy > Trade policy > Regulation of transactions > Balance of payments

See also

  • Capital balance
  • BOP

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