The Balance of Payments: A Tool of Economic Analysis

Abstract

THE BALANCE OF PAYMENTS, in its modern sense, may be defined as a system of accounts in which the accounting entity is a country or region and the entries refer to all economic transactions between residents of the country or region and residents of the rest of the world. The term "economic transactions" is used here in a broad sense to include transfers of goods, the rendering of services, and transfers of capital items, whether or not a quid pro quo is given. The quid pro quo may take the form either of payment in money or another capital item (including a promise to pay) or of payment in kind, that is in the form of goods and services. Transactions in which there is a quid pro quo may be described as two-way transactions, and those in which there is not, as one-way transactions. Two-way transactions are recorded by means of equal credit and debit entries to indicate the two sides of the transaction. For one-way transactions, the one side is recorded in the usual way and the double-entry system is preserved by offsetting this entry by a contra-entry under a heading described as "donations" or "unilateral transfers." The balance of payments is customarily divided into two major sections: a current account and a capital account. The standard