Balance of Payment (Part 1)

I. Introduction

This introduces the concept of the balance of payment (BOP). The format of the balance of payment shall be presented as provided in the BOP Manual, 5th edition as approved by the International Monetary Fund.

Measurement of the external positions of member countries has been a central feature of International Monetary Fund operations since inception. Such measurement is conducted in the dual context of Fund responsibility for surveillance of countries’ economic policies and provision of financial assistance in support of adjustment measures to correct balance of payments disequilibria. Consequently, the Fund has a compelling interest in developing and promulgating appropriate international guidelines for the compilation of sound and timely balance of payments statistics. Such guidelines, which have evolved to meet changing circumstances, have been embodied in successive editions of the Balance of Payments Manual (the Manual) since the first edition was published in 1948. Because of the important relationship between external and domestic economic developments, timely, reliable, and comprehensive balance of payments statistics based on an appropriate and analytically oriented methodology are an indispensable tool for economic analysis and policy making. Indeed, with the growing interdependence of the world’s economies, the need for such statistics—which reflects in part the underlying movement towards greater liberalization and integration of markets—has increased over time.

The revised Manual has been prepared by the Fund’s Statistics Department in close consultation with balance of payments experts in member countries and international and regional organizations (including the Statistical Office of the European Communities, the Organisation for Economic Cooperation and Development, the United Nations, and the World Bank).

II. Concept

The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time.

It is a systematic record of a nation's total payments to foreign countries, including the price of imports and the outflow of capital and gold, along with the total receipts from abroad, including the price of exports and the inflow of capital and gold.

It also draws a series of balances between inward and outward transactions, provides a net flow of transactions between residents of one country and the rest of the world; and reports how that flow is funded. Economic transactions include:

• Exports and imports of goods, such as oil, agricultural products, other raw materials, machinery and transport equipment, computers, white goods and clothing
• Exports and imports of services such as international transport, travel, financial and business services
• Income flows, such as dividends and interest earned by foreigners on investments in a country and by such country investing abroad.
• Financial flows, such as direct investment, investment in shares, debt securities, loans and deposits
• Transfers, which are offsetting entries to any one-sided transactions listed above such as foreign aid and funds brought by migrants to the country.

As defined by the Selected Philippine Economic Indicators, Bangko Sentral ng Pilipinas, balance of payment systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world.

As one of the primary functions of the IMF is to prevent financial crises and assist countries in balance of payment difficulties, the collection of standardized, comparable balance of payment data is seen as a core task.


III. Conceptual Framework of the Balance of Payment (BOP)

Most entries in the balance of payments refer to transactions in which economic values are provided or received in exchange for other economic values. These economic values consist of real resources (goods, services and income) and financial items (recorded in the balance of payments at the prices at which the items are acquired or disposed of).

Economic Territory consists of a geographic territory administered by a government; within this geographic territory, persons, goods, and capital circulate freely.

An institutional unit has a center of economic interest and is a resident unit of a country when, from some location (dwelling, place of production, or other premises) within the economic territory of the country, the unit engages and intends to continue engaging (indefinitely or for a finite period) in economic activities and transactions on a significant scale. (One year or more may be used as a guideline but not as an inflexible rule.)

A uniform basis of valuation for the international accounts (both real resources and financial claims and liabilities) is necessary for compiling, on a consistent basis, any aggregate of individual transactions and an asset/liability position consistent with such transactions. In this Manual, the basis of transaction valuations is generally actual market prices agreed upon by transactors.

In the BOP Manual and the System of National Accounts, the principle of accrual accounting governs the time of recording for transactions. Therefore, transactions are recorded when economic value is created, transformed, exchanged, transferred, or extinguished. Claims and liabilities arise when there is change of ownership.