The balance of payments for a country is a bookkeeping system which represents the sum of a countries economic transactions with the rest of the world during a set period of time. The system uses a double-entry method, where every credit has a corresponding debit entry. Ideally, this would lead to the balance of payment account reflecting a net zero bottom line, but in reality this is rarely the case.
Debits are increases in assets, while credits are decreases in a countries net assets. The balance of payment statement is broken down into three subaccounts, the current account, the capital account, and the financial account.
The current account measures flows of goods and services. It consists of merchandise flows, service flows, income receipts and unilateral transfers.
- Merchandise flows – All inflows and outflow of commodities and manufactured goods
- Service flows – Inflows and outflows from service industries, like tourism or consulting, as well as fees generated in patents and copyright transaction flows.
- Income Receipts – Income generated from ownership of assets, including foreign assets. Assets are capital in nature, like plants and businesses.
- Unilateral Transfers – Remittances and other one way transfers like foreign aid or gifts.
The capital account measures transfers of capital, from transfers of titles to fixed assets to transfers of funds linked to fixed assets. This account also includes debt forgiveness, migrant transfers, and gift/inheritance transfers.
The capital account also recognizes sales and purchases of non-produced, non-financial assets, such as transfers in natural resource rights and transfers of intangible assets.
The financial account measures investment flows. This is broken into financial assets owned abroad, and foreign owned assets in the country.
- Financial assets owned abroad: includes official reserve assets, as well as government and privately owned assets. These assets can include gold, foreign currencies, foreign securities and direct foreign investments.
- Foreign owned assets in the country: This is analogues to the above, but represent foreign interests in the domestic economy.