Balance of payments

The balance of payments is the mechanism through which all financial transactions carried out at the international level by a country's residents are recorded. This very important mechanism is in charge of telling them if savings are made sufficiently apt to be able to pay for the imports that are made. In addition, it helps to show if the country is producing enough economic income to be able to pay for its growth. The balance of payments should be reported either quarterly or annually. A balance of payments deficit means that the country imports more goods, services and capital than it exports. When this is the case, the country must borrow money from other countries in order to pay for all its imports.

Related topics

Balance of trade, economies of scale, macroeconomics

What is the balance of payments?

It is the relationship between the amount of money that a country must spend buying abroad and the amount of money it earns selling its products to other countries and involves goods and services, as well as different capital.

About the balance of payments

The balance of payments consists of establishing the relationship between the money that a country spends in other countries buying goods and services and the amount of money that other countries spend on it. All transactions involving trade, goods, services and a country’s capital must be recorded in it for a specific period of time. It is a way of measuring the equilibrium between income and expenses in the long term with the aim of trying to maintain a stable economy and avoid debts. It then consists in the recording of all types of international economic transactions that a country carries out, usually in the period of one year.

Balance of payments characteristics

Among its main characteristics we can mention the following:

• The balance of payments must have an almost perfect balance because the payments must not and cannot suffer from a deficit or a surplus.
• It is divided into current and capital flows, which must be equal.
• It should be kept as an accounting account with two different entries: one where credits are recorded and the other where debits are recorded.
• It is an account that is made between the residents of a given country with the residents of a different country.
• It is used to carry out international economic transactions, including goods, services and capital goods.
• It does not have any type of economic tendency.
• It is of periodic presentation and reflects all the transactions that are carried out in a determined time.
• It can be presented quarterly or annually.

Aims and objectives

The main objective of the balance of payments is to provide detailed information with respect to all transactions conducted internationally. It also seeks the best way of correcting and repairing payment deficits by means of a controlled increase in exports and a decrease in imports, which in turn requires government controls.

Structure

The balance of payments is structured in four different parts:

• Current account: which records the collections, payments and profits that come from the trade of goods and services, interest and dividends that the country has managed to obtain as capital invested in another country. It is subdivided into the visible balance and the invisible
• Account for goods and services: it is also known as trade balance and its source of information is data from the customs departments of tax agencies. It records the different payments and receipts that come from imports and exports. It collects all the income and payments that come from the sale and purchase of services between a country and the inhabitants of a different countries.
• Primary income accounts: this is also called the factorial services balance and collects the income and payments of a country or the investments made by the inhabitants of a country with the rest of the world.
• Secondary income accounts: transactions are recorded that are in the form of donations or prizes and can be of a public or private nature.
• Capital accounts: This records capital transfers and the acquisition of non-financial assets such as land and land resources.
• Financial account: records variants of assets and liabilities outside the country.

Types

• Checking account.
• Capital account.
• Financial account.
• Account of errors and omissions.

Analysis

It can be analyzed by means of a vertical one, which involves the formation of accounting entries to reflect a periodic flow statement to observe profits and losses. Its purpose is to give references if the fund movements were created by current or capital transactions.

Equilibrium

A balance is sought between the transactions that are carried out independently so that if the balance of the trade balance is zero, an external balance is produced.

Importance of the balance of payments

It is important because it reflects an appropriate balance between a country’s finances, financial statements and economy. It reflects payments and liabilities abroad and is one of the main indicators of the situation of a given country with respect to international trade, with net capital outflows.

Examples

• Argentina: this type of balance of payments sums all current, capital and financial account balances, including errors and omissions to know the variation of international reserve assets. They present the financial account broken down by sector: financial, non-financial public, private and non-financial private.
• Panama: this country has been one of the countries with the highest economic growth in Latin America. They achieved this by increasing project imports and foreign investment, which has helped them compensate for the imbalance in the balance of payments.
• Costa Rica: the country has managed to accumulate more exports by the end of 2017 through exports of goods that managed to increase and balance the balance of payments, this coupled with the consumption moderation of different goods and services by Costa Rican households.