Balance of Payment Statistics (BoP)

Definition

The balance of payment statistics measures the economic transactions of an economy compared to the rest of the world.

Recommended documentation: "Balance of Payments Manual 5" (BPM5). The manual describes the methodology for measuring and comparing the economic transactions of an economy with the rest of the world. The International Monetary Fund is the custodian of BPM5. https://www.imf.org/external/np/sta/bop/BOPman.pdf

Finally, the balance of payment (BoP) measures how much money is going in and out of a country:

incoming money -> assets/credits from foreign countries

outgoing money -> debits/liabilities to foreign countries

This means a positive account reflects net inflows, the country's credits exceed the countries debits. Or, in the case of a negative account, the country has more liabilities than credits and therefore generates net outflows.

There are three main BoP divisions:

Current Account

Capital Account

Financial Account

The Current Account

It mainly marks the inflow and outflow of goods and services... and provokes questions even by Donald Trump, the President of the United States: Why are there so many Mercedes-Benz cars in New York but so few Chevrolet sales in Germany?

The Current Account includes:

the trade balance (exports/imports of goods)
the services account balance including transportation, tourism and other services (e.g. royalties and licence fees)
the balance of factor incomes and transfers (e.g. transnational dividend payments or income transfers from migrants to their relatives abroad, transfers of donations and aids)

If more money leaves a country for paying imports than could be generated by its own export activities abroad, its current account balance is negative: exports < imports. Or vice versa, the current account balance is positive, if the exports exceed the imports: exports > import.

Examples

Germany's trade balance with the United States of America on the level of "Motor Cars and Other Motor Vehicles":

Comparing the US and German current account balances with the rest of the world, it shows that Germany's exports (credits) exceed its imports (debits) by 284 Billion USD and the US economy's imports (debits) exceed its exports (credits) by 463 Billion USD in 2015:

Differentiated by goods and services, the following chart identifies a strong position in the US services. It generates a similar strong surplus compared to the German trade in goods (229/245 Billion USD in 2015):

The Capital Account

It records all international capital transfers referring to acquisitions/disposals of non-financial assets/non-produced assets:

monetary flows from debt forgiveness
transfer of goods
financial assets from migrants
transfer of ownership on fixed assets (e.g. acquisitions of land)
transfer of funds received for the sale/acquisition of fixed assets
gift and inheritance taxes
death levies
uninsured damage to fixed assets

The capital account measures the flows and directions of capital. Transfers out of a country are recorded as a debit (export), inflows are recorded as a credit (import). If the debits exceed the credits, the capital account balance is positive and vice versa.

Example: A foreign investor buys the local offshore wind farm. The purchase price is registered as a credit (import) and lowers the domestic capital account balance accordingly. This is because money is coming into the country. However, because this is an investment, there is an implied return. This return to the foreign investor is recorded as a debit (export) in the current account.

The Financial Account

It details government-owned assets and private sector assets held in other countries, and local assets hold by foreigners:

foreign direct investment
global monetary flows related to investment in business
real estate
bonds
stocks
foreign reserves
gold
special drawing rights (SDR)
private assets held abroad
direct foreign investment assets owned by foreigners

Both, the capital and financial accounts record international capital flows. Therefore, the financial accounting corresponds to the capital account. The flow of money defines the kind of record in the same way. Again, transfers out of a country are recorded as a debit (export), inflows are recorded as a credit (import).

Example: A foreign oligarch is looking for a safe harbour for his money. US government bonds can be seen as a first address. The following monetary inflow to the US bonds market lowers the US financial accounts corresponding to the oligarch's investment level. Later interest payments entitled to the oligarch are recorded as a debit in the US current accounts, unless otherwise regulated.

Conclusion

The capital/financial account mirrors the current account. In this perception, the BoP would be zero, balanced out by the current account on the one side and the capital/financial account on the other. The export of goods & services (positive inputs to the current account) generates credits and inflows of money (negative inputs to the capital account). The import of goods & services (negative inputs to the current account) generates debits and outflows of money (positive inputs to the capital account).

Regularly monitored, discrepancies in the BoP (balance <> zero) are caused by unexplained transactions in the current account or capital/financial account.

For the underlying economics also consult e.g. Paul Krugman's "Economics".

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