Since the formation of the first states in the history of mankind, trade has gone beyond the boundaries of one country. At first, it could have been an exchange of goods, but after the advent of money, the scale of trade operations changed significantly.
Concept
For too long international trade deals between countries have had no name. For the first time, such a concept as the balance of payments was introduced into financial terminology in 1767 by James Denem-Stewart, a British economist. In his understanding, this term meant the expenditure by citizens of money abroad and the payment of debts to foreigners.
In the modern interpretation, the balance of payments is payments made from one country to another. Let's take a closer look at its structure and history.
Conditions and need for international balance sheets
As history has shown, the emergence of such a financial category as the balance of payments significantly changed the national economy of most countries.
If at the end of the 19th and at the beginning of the 20th century the cost of currencies was at the same level for a sufficiently long period of time, supported by the "gold standard", which, in fact,and formed their course (which suited everyone), then in the conditions of a “floating” rate, this approach became unprofitable.
Previously, the financial item "Reserve Assets" participated in the regulation of any changes in the exchange rate. In our time, it is the country's balance of payments, or rather, its condition, that affects the fall or rise of the exchange rate. This financial category had to go through several transformations in order to come to the structure that the International Monetary Fund represents today.
Main financial approaches
Currently valid are:
- The theory proposed by David Hume is considered a classic. It is called "automatic balance". It was in it that the main work on the regulation of exchange rates was carried out by the Reserve Assets.
- The next step was the neoclassical approach, called elastic. Such financial geniuses as J. Robinson, A. Lerner, L. Metzler took part in its development. According to their theory, the backbone of the country's balance of payments is its foreign trade, the balance of which is determined by the level of prices for exported goods in relation to imported goods and multiplied by the underlying exchange rate. With this approach, the balance of the balance is ensured by a change in the exchange rate. That is, its devaluation will reduce prices in foreign currency for export goods, while revaluation will “force” foreign buyers to purchase products of this country at a higher cost.
- The next theory is the absorption approach, in which the balance of payments(precisely its trading part) is "tied" to the main elements of the country's GDP. The founder of this approach was S. Alexander, who took as a basis the ideas put forward by J. Mead and J. Tinbergen. The regulation of the balance of payments in this case is carried out by stimulating exports while restraining imports. This should encourage domestic producers to produce competitive products and provide the same high level of services, and not depend solely on currency devaluation, as in the previous approach.
- Monetarist theory of balance is tied to monetary factors, namely, how the balance affects the circulation of money in the country. Here the approach is as follows: in order to avoid a deficit in the balance of payments, it is necessary to strictly control the amount of money circulating in the country. If there are too many of them, then they should be disposed of by purchasing foreign goods or services.
All of the above approaches have been applied at different times and remain relevant today. Depending on which of the two is currently used in a country, the types of transactions carried out by it depend.
Structure
As a rule, many countries use trade operations as a balance of payments regulation, seeking to achieve a positive balance. In fact, there may be several such operations.
The International Monetary Fund has compiled a balance of payments scheme, which includes 112 items divided into 7 blocks. This scheme is extremelydifficult for people ignorant in financial areas, so it has been simplified to three parts, reducing everything to the following sections:
- current account;
- accounts related to capital transactions (financial instruments);
- operations regulating the balance of payments.
Let's take a closer look at what they are.
Basic Payment Transaction Accounts
The current accounts of the balance of payments include:
- export of goods;
- import products.
And together they make up the balance of trade. Also need to mention:
- services (included in the balance of trade and services);
- investment income;
- transfers.
As a rule, the current accounts of the balance of payments reflect all cash receipts that come from the sale of goods and services to non-residents, as well as net income from investment projects. All export proceeds are taken into account in the column with a plus, since in these transactions the treasury is replenished with foreign currency. When import operations are carried out, they are taken into account as a minus in the debit column, since there is an outflow of currency from the country.
All over the world, foreign trade is the basis of countries' balance of payments. It occupies up to 80% of the volume in international economic relations. If, at the same time, the balance sheet is positive, then this is a sign that high-quality competitive products are produced in this country.
Balance of payments accountsby capital
The capital and instrument accounts include:
- direct capital account;
- financial accounts, which include the following instruments: direct investment, portfolio and other investments.
Capital accounts include all types of purchase and sale and transactions on them, capital transfers, cancellation of debts, investment grants, transfer of property rights, cancellation of debts to the government, transfer of rights as tangible (for example, the bowels of the earth), and intangible (trademarks, licenses, etc.) assets.
When there is an inflow of currency into the treasury from these accounts, we can talk about a positive balance. And vice versa.
Financial accounts are associated with transfers of ownership of a country's financial assets. The loans provided can take the form of both direct and portfolio investments.
What is the balance in payment transactions
These concepts are the basis of any financial transactions, as they determine their quality. The balance of payments is a group of accounts that should ideally be positive after those financial transactions that were carried out in the country or abroad (export-import).
These operations, in turn, are divided into primary (that is, they are independent and have stable growth trends) and secondary (short-term, are under external influence, for example, the Central Bank or the Government of the country).
All countries in the world strive to achieve an active, at the very least, zero balance of payments. If at some economic stage of a country's development its balance is in the red for a long time, then the reserves of gold and foreign currency in the Central Bank are reduced until the devaluation of its domestic currency sets in.
Payment Methods
Any payments made between countries are shown in two columns: credit and debit, and the difference between them is taken into account either as a positive or negative balance.
For example, when a country exports goods, labor, services, information or knowledge and its treasury receives an inflow of foreign currency, then all receipts from the operations performed will be entered in the column with the “+” sign of the balance of payments according to loan.
The same operations, but only for imports, entailing an outflow of currency from the country, are entered in the "debit" column with a "-" sign.
If a country buys real capital (currency, securities) abroad, then such financial transactions are also recorded in the "debit", so there is an outflow of currency. In the event that, on the contrary, it sells domestic capital or writes off debt to non-residents (individual companies or the whole country), then this will be recorded under the “loan”. For example,
| Operation | Credit plus (+) | Debit, minus (-) |
|
Goods and services Return on investment and wages Transfers |
Export of goods and services Receipts from non-residents Receive funds |
Import of goods and services Payments to foreign partners Transmission |
|
Purchase/sale of non-financial assets Transactions in financial assets or liabilities |
Asset sale Growth of obligations towards foreign partners/reduction of requirements towards them |
Asset Acquisition Increasing requirements for foreign partners or reducing obligations towards them |
The balance of payments is a document that records the foreign economic relations and operations of the country, and since it has an international format, all cash flows are recorded in dollars.
Deficit and surplus in the balance sheet
These two concepts are associated with activities that either finance a negative balance or apply its positive counterpart.
The deficit in the balance sheet must be covered by something, and here it is important to determine whether it will be an overseas business account or capital in the form of loans.
The first, of course, is preferable, since it ensures the inflow of currency into the country, while loans will entail its outflow, and even with interest.
As a last resort, you can use the country's gold and foreign exchange reserve to cover the deficit in the balance sheet, and, well, a completely desperate step is the devaluation of the domesticcurrency.
When there is a surplus generated in the course of current operations, the country spends the capital received on emerging negative balances. Also, part of the money goes to the article “Pure errors and omissions.”
MFI payment scheme
The structure of the balance of payments adopted in 1993 by the IMF includes:
- Settlement balance. All financial obligations of one country in relation to another / other states and their fulfillment within the terms specified in the agreement are implied.
- International debt balance. This includes actual payments to other countries and the inflow of money from them.
In reports on these types of balances, the amount of credit transfer of money must match the debit one.
Russian balance sheet
If we consider the balance of payments of Russia, then the main movement of foreign currency is displayed in the following ratios of imports and exports:
- overseas shipping;
- tourism sector;
- buying or selling licenses (patents, brands);
- trading;
- international insurance;
- direct or portfolio investment and much more.
For the first time, according to the structure proposed by the IMF of Russia, the balance of payments was compiled back in 1992, and since then it has been drawn up according to the same schemes.
Throughout the time, the main source of foreign exchange inflow into the country was the export of oil and gas, timber, weapons, equipment, coal and other products.
The main foreign trade partners of Russia are China, USA, Germany, Kazakhstan, Belarus and otherscountries near and far abroad.
Conclusion
So, the balance of payments is a statistical report of all international transactions that take place between countries. It indicates transactions, dates of payments, debit, credit and balance on them.
All three sections of the balance of payments reflect the financial position of the country by:
- current operations;
- capital and financial instruments;
- omissions and errors.
They are the structure of the balance of payments. All countries in the world adhere to these parameters.
