Now that we have seen the factors that affect the major types of international transactions, we will show how these transactions are measured in the balance of payments.
Despite the implications of its name, the balance of payments does not measure the levels of anything. The balance of payments measures changes, flows. If we have to compare the balance of payments with one of the traditional statements used to report the financial condition of a company, the balance of payments is most similar to a statement of sources and uses of funds. The balance of payments measures the sources and uses of foreign exchange during the period indicated by the statement. Of course, the only transactions reflected in the balance of payments are those between the citizens of the given country and the residents of other countries. Transactions among citizens of the same country do not enter the balance of payments. They are not a source or a use of foreign exchange for the country as a whole.
In the balance of payments, the sources of foreign exchange, or the supply of foreign exchange, are indicated by positive numbers. The uses of foreign exchange, or the demand for foreign exchange, are indicated by a minus sign. Exhibit 6.1 shows a summary of the balance of payments for the United States in 1980. In this exhibit, we can see that the figure for merchandise exports has a positive sign. (In many presentations the positive sign is not printed.) When a country exports merchan¬dise, foreigners make payments in their currency. Foreigners’ currency is a source of supply of foreign exchange to the country for which the balance of payments is being prepared. In Exhibit 6.1 the figure for merchandise imports is accompanied by a minus sign. As a country purchases merchandise, it offers its own currency, that is, it demands foreign exchange, to be able to pay for the imported merchandise.
For each group of accounts in the balance of payments it is possible to compute a “balance.” Thus, the net between exports and imports in merchandise is called the merchandise trade balance, or just trade balance. In Exhibit 6.1 this trade balance is a deficit of $25.31 billion. News about developments in the trade balance usually have an immediate impact on the foreign exchange markets, and of all the accounts in the balance of payments, trade figures are available earliest. In addition, the trade balance constitutes the major portion of the balance of payments in most countries.
We can also compute a balance of trade in goods and services by adding the balance in the service account to the merchandise trade balance. In Exhibit 6.1 this balance is a surplus of $11.31 billion. When we add the value of gifts transferred among countries (unilateral transfers) to the above figure, we obtain the current account balance, a surplus of $3.72 billion for the United States in 1980.
The capital forex trading accounts follow the same conventions as the trade accounts; so, entries preceded by a minus sign indicate an increase in the demand for foreign currency. This occurs when the citizens of the given country purchase foreign securities. In order to pay for these securities. the domestic citizens must purchase. that is. demand. foreign currency.
When the entries in the capital accounts are positive. they indicate an increase in the supply of foreign currency. This increase occurs when foreigners purchase securities issued by the country in question. In order to pay for their purchases. foreigners offer foreign exchange to the given country. The purchase of securities by foreigners is an increase in the country’s liabilities.
If all the forex accounts in the balance of payments are considered. we shall find that (as with the sources and uses of funds statements for a firm), the plus amounts equal the minus amounts. Adding all the balance entries in the right-hand column of Exhibit 6.1 will produce a zero balance. In this sense, the balance of payments always “balances.” It is a historical report; after the fact. total sources are always equal to total uses of funds. or, quantity supplied is always equal to quantity demanded.
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