Balance of PaymentsSummary by Leon Taylor

Two Rules of Thumb in International Economic Accounting

Transactions Viewed as credit Viewed as debit

Examples Payment to KZT is

credit Payment by KZT

is debit

Transactions are Credits and debits Double character

Transactions enter accounts twice

Example KZT sells oil to

China for 60 USD [9 000 Tenge]

Recording the Oil Transaction Sale of oil enters the current account as

credit [KZT received payment of 60 USD] Receipt of the 60 USD enters the capital

account as a debit KZ must spend the 60 on a dollar

denominated asset If oil extractor converts the 60 to 9 000 Tenge

to pay wages, the 60 ends up in a KZ bank account

Bank then uses the 60 to purchase a dollar denominated asset

Current Account Transactions with Goods and Services Compensation of employees balance Investment Income Balance Current Transfers

Transactions in Goods and Services

Export and imports Goods Services

Counter-trade as well as payment for good or service

Countertrade is a form of barter

Compensation of employees balance

Payments made to migrant workers and non-resident workers KZ worker exports a service to another

country Wage is credit in current account

Migrant wages remitted to Tajikistan Wages are debits in current account

Investment Income Balance Net payments of interest or dividends

KZ investor buys 1 share of GM Purchase is a debit Dividend payment is credit

Other view Transaction may be viewed as credit

since person has claim on financial asset of GM

Transfer Payments International gifts or transfer payments

Capital and Financial Account

Capital account Credit and debit entries for non-produced,

nonfinancial assets and capital between residents and non-residents Land Leases, licenses

Financial Account Net acquisition and disposal of financial

assets and liabilities

Examples on Cap/Fin Account Allianz borrows 1 million USD from

Sberbank in Russia Credit – payment to KZ Debit – asset sold by KZ

Lease of drug patent KZT and US drug firm Payment is KZ debit US drug has Tenge, convert or acquire

smthg. in KZ, entered as credit

Double entry accounting Credit

Export of good or service Income receivable Reduction in assets Increase in liabilities

Debit Import of goods and services Income payable Increase in assets Reduction in liabilities

Example KZ sells oil for 60 USD

Credit – export of oil Debit – receipt of 60 USD

Increase in financial asset KazKommerzbank sells share to UK

investor for 100 USD Credit – reduction of financial asset Debit - receipt of cash as it increase

financial assets

Example BTA borrows 1 million from US bank

Credit – loan as it increases liability Debit – cash received as it increases

financial assets

Additional Reading Krugman, Paul R., and Maurice Obstfeld.2009. International

economics: Theory and policy. Eighth edition. Boston: Pearson. Chapter 12: National income accounting and the balance of payments. Presents the two rules-of-thumb discussed at the beginning of this memo.

International Monetary Fund.2007. The balance of payments and international investment position manual. Sixth edition. Available for free at http://www.imf.org/external/pubs/ft/bop/2007/bopman6.htm. Discusses the nitty-gritty details. The “international investment position” measures the stock of international assets of a nation; the “balance of payments”, changes in those assets.