The balance of payments accounts
The balance of payments of a country summarises all the transactions of its
residents, firms, and government with their counterparts in the rest of the world
during a given period (a year, as a rule).
The balance of payments is a double-entry bookkeeping system. This means
that any international transaction is entered twice because every transaction has two
sides.
The generated receipts from foreigners are referred to as credits, while the
reverse outflow of goods and services, for example, is accounted as debits. The
inflow of goods and services enter the credits in the bookkeeping but the payments to
the rest of the world they generate enter the debits.
The balance of payments is divided into subaccounts corresponding to the various
categories of international transactions in which individuals, firms and government
participate.
Individuals and firms engage in international transactions when they buy or sell
goods or services abroad, borrow or land abroad, or buy and sell buildings,
equipment, or land located abroad. Government agencies also can engage in any of
these transactions plus other official transactions outside the country.
This simple classification can be used to express the balance of payments in terms
of three basic accounts:
 the current account,
 the capital account, and
 the official settlements account.
The major categories of items within the current account are:
a) imports and exports of goods - the trade balance;
b) current income earned on international investment;
c) travel and transportation;
d) imports and exports of other services;
e) unilateral transfers, including worker remittances and pension payments;
f) current transactions undertaken by military.
The balance on the current account represents the difference between total
receipts (credits) by residents for current account transactions, and total payments
(debits) by residents for current account. A negative value of this balance
indicates a deficit on the current account, while a positive value indicates a
surplus.
A deficit on the trade balance may provoke protectionist policies to restrict
imports. But neither the trade balance, nor the current account represents a
complete picture of a country’s transactions with the rest of the world. The
primary items missing here are information concerning borrowing and lending
activities, purchases and sales of assets, and changes in the stock of reserves.
The capital account records international borrowing and lending and purchases and
sales of assets by individuals and firms. Exports of capital increase residents’
ownership of foreign assets but represent outflows of funds and are reported as debits.
Credit transactions in the capital account occur when foreign residents purchase
assets in the country (imports of capital).
The difference between capital inflows and capital outflows is the capitalaccount balance: a surplus if inflows overweigh outflows, and a deficit if outflows are
larger than inflows.
If the combined balance on the current and capital accounts is in deficit there
must be an offsetting credit balance in the official settlements account. Unlike the
current and capital accounts, all transactions within the official settlements account
are conducted by official government authorities rather than by individuals and firms.
The official settlements balance gives the net change in country’s stocks of foreign
exchange reserves and official government borrowing.
The balance of payments must always balance in the sense that total credits
must equal total debits. If private parties have to pay more to the rest of the world than
they generate, official government actions are undertaken to balance for the deficit
either by government buying or borrowing of international reserves at the
international financial markets or from foreign central banks or international agencies.