Chapter 1 The Balance-of-Payments
Unit 1
LEARNING OUTCOMES 学习效果:
At the end of this lecture, students should be able to
understand the concepts and principles of the Balance-of-Payments(BOP)
identify the credit and debit transactions on the balance of payments
write the double entries on the balance-of-payments for specific tansactions
FOCUS AND DIFFICULTIES 知识重难点:
Focus: Accounting Principles of the Balance-of-Payments: the credit and debit transactions
Difficulties: Double-Entry Basis of Balance of Payments Statistics: Recording for individual transactions, and Aggregate recording
LECTURE VIDEO 授课视频:
LEARNING OUTLINE 学习大纲:
1. The Balance-of-Payments
a. Definition of balance-of-payments: a record of the economic transactions between the residents of one country and the rest of the world
1) Records of balance-of-payments are kept annually and quarterly.
2) An international transaction is an exchange of goods, services, income or financial assets/liabilities between residents of one country and those of another.
3) Residents include businesses, individuals and government agencies that make the country their legal domicile.
● A U.S. resident is defined to include (1) individuals who reside or intend to reside in the United States for more than one year; (2) business enterprises and nonprofit organizations established under U.S. laws, including corporations, partnerships, and proprietorships; and (3) U.S. federal, state, and local governments, together with their subdivisions.
4) The balance-of-payments records the “Flows”: economic value of any exchange or transaction and other changes in financial assets/liabilities within an accounting period.
5) The sixth edition of the Balance of Payments and International Investment Position Manual (BPM6, the Manual) serves as the standard framework for statistics on the transactions and positions between an economy and the rest of the world. (Attached the BPM6 file in the following)
2. Accounting principles of balance-of-payments
a. The accrual basis is used for determining the time of recording of flows. For example, transactions in goods should be recorded as of the time that the change of economic ownership takes place.
b. Market prices are the basis for valuation in the international accounts. For example, market prices for transactions are defined as amounts of money that willing buyers pay to acquire something from willing sellers.
c. International accounts can be compiled in the domestic currency as well as in an international unit of account (a foreign currency, such as US dollar, SDRs).
d. Balance-of-Payments accounting is just an international application of the fundamental accounting principle of double-entry bookkeeping.
1) Arranging international transactions into a balance-of-payments account requires that each transaction be entered as a credit or a debit.
a) A credit transaction results in a receipt of a payment from foreigners; recorded with a plus(+) sign.
● Credit(CR.): exports of goods and services, income receivable, increases on the holdings of financial liabilities, and decreases on the holdings of financial assets.
b) A debit transaction is one that leads to a payment to foreigners; recorded with a minus(-) sign.
● Debit(DR.): imports of goods and services, income payble, decreases on the holdings of financial liabilities, and increases on the holdings of financial assets.
2) For each transaction,each party records a matching credit and debit entry:
Example 1: A U.S. exporter sells goods to a foreigner for $100 in currency. For the U.S. seller,
Exports $100 (CR.)
Currency $100 (DR.---increase in financial assets)
(The transaction involves the provision of physical resources to nonresidents and a compensating receipt of financial resources from nonresidents.)
Example 2: A U.S. residents sells his holdings of shares to a foreigner for $50 in currency. For the U.S. seller,
Shares and other equity $50(CR.---decrease in financial assets)
Currency $50(DR.---Increase in financial assets)
(The selling party provides shares and receives currency in return.)
Example 3: A U.S. borrower receives a loan of $70 in cash from one foreign bank. For the U.S. borrower,
Loan $70(CR.---increase in financial liabilities)
Currency $70(DR.---increase in financial assets)
e. In balance of payments aggregates, the current and capital account entries are totals, while financial account entries are net values for each category/instrument for each of assets and liabilities. (Refer to the U.S. Balance-of-Payments and 中国国际收支平衡表 in 2022 Q3, attached the following files)
f. As a result of the two-entry nature of each transaction, the difference between the sum of credit entries and the sum of debit entries is conceptually zero in the national balance of payments, that is, in concept, the accounts as a whole are in balance.
g. For any single subaccount or any combination of subaccounts that is not the entire balance of payments, the balance could be positive, zero, or negative. A positive balance is called a surplus, and negative balance is called a deficit.
