We have all heard of the balance of payments. Unfortunately, common
usage does not allow us to discuss the balance of payments because there
are several ways to measure the balance, and the press often blurs the
distinctions among these various measures. In general, the balance of payments
records a country’s trade in goods, services, and financial assets with
the rest of the world. Such trade is divided into useful categories that provide
summaries of a nation’s trade. A distinction is made between private
(individuals and business firms) and official (government) transactions.
Balance of payments data are reported quarterly for most developed
countries. Figure 3.1 presents the balance of payments as reported by the
U.S. Department of Commerce. This rather imposing document is of
great use to economists, but it provides more detail than we need be
concerned with here. To identify the popular summary measures of the
balance of payments, we are interested only in broad definitions. We must
be aware that although the several broad measures have their uses, they
also have drawbacks, as will be pointed out in the following discussion.
The balance of payments is an accounting statement based on doubleentry
bookkeeping. Every transaction is entered on both sides of the
balance sheet, as a credit and as a debit. Credit entries are those entries
that will bring foreign exchange into the country, whereas debit entries
record items that would mean a loss of foreign exchange. In Figure 3.1,
debit entries are recorded as a negative value. For instance, suppose we
record the sale of a machine from a U.S. manufacturer to a French
importer and the manufacturer allows the buyer 90 days credit to pay.
The machinery export is recorded as a credit in the merchandise account,
whereas the credit extended to the foreigner is a debit to the capital
account. The capital we speak of is financial capital. Thus, credit extended
belongs in the same broad account with stocks, bonds, and other financial
instruments of a short-term nature. If, for any particular account, the value
of the credit entries exceeds the debits, we say a surplus exists. On the
other hand, where the debits exceed the credits, a deficit exists.
We have all heard of the balance of payments. Unfortunately, commonusage does not allow us to discuss the balance of payments because thereare several ways to measure the balance, and the press often blurs thedistinctions among these various measures. In general, the balance of paymentsrecords a country’s trade in goods, services, and financial assets withthe rest of the world. Such trade is divided into useful categories that providesummaries of a nation’s trade. A distinction is made between private(individuals and business firms) and official (government) transactions.Balance of payments data are reported quarterly for most developedcountries. Figure 3.1 presents the balance of payments as reported by theU.S. Department of Commerce. This rather imposing document is ofgreat use to economists, but it provides more detail than we need beconcerned with here. To identify the popular summary measures of thebalance of payments, we are interested only in broad definitions. We mustbe aware that although the several broad measures have their uses, theyalso have drawbacks, as will be pointed out in the following discussion.The balance of payments is an accounting statement based on doubleentrybookkeeping. Every transaction is entered on both sides of thebalance sheet, as a credit and as a debit. Credit entries are those entriesthat will bring foreign exchange into the country, whereas debit entriesrecord items that would mean a loss of foreign exchange. In Figure 3.1,debit entries are recorded as a negative value. For instance, suppose werecord the sale of a machine from a U.S. manufacturer to a Frenchimporter and the manufacturer allows the buyer 90 days credit to pay.The machinery export is recorded as a credit in the merchandise account,whereas the credit extended to the foreigner is a debit to the capitalaccount. The capital we speak of is financial capital. Thus, credit extendedbelongs in the same broad account with stocks, bonds, and other financialinstruments of a short-term nature. If, for any particular account, the valueof the credit entries exceeds the debits, we say a surplus exists. On theother hand, where the debits exceed the credits, a deficit exists.
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