balance of payment of india (ppt)
Short Definition A country's balance of payments is commonly defined as the record of transactions between its residents and foreign residents over a specified period. Each transaction is recorded in accordance with the principles of double-entry bookkeeping, meaning that the amount involved is entered on each of the two sides of the balance-of-payments accounts. Consequently, the sums of the two sides of the complete balance-of-payments accounts should always be the same, and in this sense the balance of payments always balances.
However, there is no bookkeeping requirement that the sums of the
two sides of a selected number of balance-of-payments accounts should be
the same, and it happens that the (im)balances shown by certain combinations
of accounts are of considerable interest to analysts and government
officials. It is these balances that are often referred to as “surpluses” or
“deficits” in the balance of payments.
This monograph explains how such measures of balance are derived
and presents standard interpretations of them. Full understanding requires
a grasp of elementary balance-of-payments accounting principles, so these
principles are outlined and illustrated in the first two sections.
Recording of Transactions: General Principles
The double-entry bookkeeping used in accounting for the balance
of payments is similar to that used by business firms in accounting for their
transactions. In ordinary business accounting the amount of each transaction
is recorded both as a debit and a credit, and the sum of all debit entries
must, therefore, equal the sum of all credit entries. Furthermore, in business
accounting it is recognized that the total value of the assets employed by
the firm must be equal to the total value of the claims against those assets,
that is, that all the assets belong to someone. As is well known, the claims
against the assets are called the liabilities of the firm. (Assets of the firm not
subject to the claims of creditors are, of course, the property of stockholders,
so that, broadly speaking, the firm has two classes of liabilities: those
due to creditors and those due to stockholders.) By accounting convention,
a debit entry is used to show an increase in assets or a decrease in liabilities,
while a credit entry is used to show an increase in liabilities or a decrease
in assets. Since a debit entry is always accompanied by a credit entry, it
follows that the value of total assets on the books of a going concern is
always equal to the value of total liabilities (including the claims of
These elementary principles can be applied to the recording of
transactions in the balance of payments. For example, when a foreigner
gives up an asset to a resident of this country in return for a promise of
future payment, a debit entry is made to show the increase in the stock of
assets held by U.S. residents, and a credit entry is made to show the
increase in U.S. liabilities to foreigners (that is, in foreign claims on U.S.
residents). Or when a U.S. resident transfers a good to a foreigner, with
payment to be made in the future, a debit entry is made to record the
increase in one category of U.S. assets (U.S. financial claims on foreigners,
that is, U.S. holdings of foreign IOUs), and a credit entry is made to record
the decrease in another category (goods).
These principles are illustrated in greater detail in the following
section, which through a series of examples constructs a hypothetical
Recording of Typical Transactions
The balance-of-payments accounts are commonly grouped into
three major categories: (1) accounts dealing with goods, services, and
income; (2) accounts recording gifts, or unilateral transfers; and (3) accounts
dealing basically with financial claims (such as bank deposits and stocks and
bonds). This section shows how typical transactions in each of these major
categories are recorded.
COMMERCIAL EXPORTS: TRANSACTION 1
Suppose that a firm in the United States ships merchandise to an
overseas buyer with the understanding that the price of $50 million,
including freight, is to be paid within 90 days. In addition, assume that the
merchandise is transported on a U.S. ship.
In this case U.S. residents are parting with two things of value, or two
assets: merchandise and transportation service. (Transportation service, like
other services supplied to foreigners, can be viewed as an asset that is
created by U.S. residents, transferred to foreigners, and consumed by
foreigners all at the same time.) In return for giving up these two assets, U.S.
residents are acquiring a financial asset, namely, a promise from the foreign
customer to make payment within 90 days. In accordance with the
principles outlined above, the bookkeeping entries required to record
these transactions are as follows: first, a debit of $50 million to an account
we shall call, “U.S. private short-term claims,” to show the increase in this
kind of asset held by U.S. residents; second, a credit of $49 million to
“Goods,” and third, a credit of $1 million to “Services.” The credit entries,
both in the export category, show the decreases in the assets available to
U.S. residents. These figures are entered on lines 19, 2, and 3 in the table
on page 2 and are preceded by the number (1) in parentheses to identify
them with the first transaction discussed.
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