Balance of Payments
Definition:
Summary of transactions between domestic and foreign residents for a specific country over a
specified period of time.
Components of the Balance of Payments Statement:
1. Current Account: summary of flow of funds due to purchases of goods or services or the provision
of income on financial assets.
a. Payments for Goods and Services
Merchandise exports and imports represent tangible products that are transported between
countries. Service exports and imports represent tourism and other services. The difference
between total exports and imports is referred to as the balance of trade.
b. Primary Income Payments
Represents income earned by MNCs on their direct foreign investment as well as income
earned by investors on their portfolio investments.
c. Secondary Income
Represents aid, grants, and gifts from one country to another.
Examples of payment entries:
U.S. Cash Flow Entry On U.S. Balance
International Trade Transaction
Position Of-Payments Account
Walmart purchases clothing produced in
U.S. cash outflow Debit
Indonesia that it will sell in its U.S. retail stores.
Individuals in the United States purchase leather
goods over the Internet from a firm based in U.S. cash outflow Debit
Italy.
The Mexican government pays a U.S. consulting
U.S. cash inflow Credit
firm for consulting services provided by the firm.
The Home Depot headquarters in the United
States purchases lumber from Canada that it U.S. cash outflow Debit
uses in assembling kitchen cabinets.
A university bookstore in Ireland purchases
textbooks produced by a U.S. publishing U.S. cash inflow Credit
company.
A U.S. investor receives a dividend payment from
U.S. cash inflow Credit
a French firm in which she purchased stock.
The U.S. Treasury sends an interest payment to
a German insurance company that purchased U.S. cash outflow Debit
U.S. Treasury bonds one year ago.
Apple's foreign subsidiaries remit earnings to
U.S. cash inflow Credit
their U.S. parent.
Definition:
Summary of transactions between domestic and foreign residents for a specific country over a
specified period of time.
Components of the Balance of Payments Statement:
1. Current Account: summary of flow of funds due to purchases of goods or services or the provision
of income on financial assets.
a. Payments for Goods and Services
Merchandise exports and imports represent tangible products that are transported between
countries. Service exports and imports represent tourism and other services. The difference
between total exports and imports is referred to as the balance of trade.
b. Primary Income Payments
Represents income earned by MNCs on their direct foreign investment as well as income
earned by investors on their portfolio investments.
c. Secondary Income
Represents aid, grants, and gifts from one country to another.
Examples of payment entries:
U.S. Cash Flow Entry On U.S. Balance
International Trade Transaction
Position Of-Payments Account
Walmart purchases clothing produced in
U.S. cash outflow Debit
Indonesia that it will sell in its U.S. retail stores.
Individuals in the United States purchase leather
goods over the Internet from a firm based in U.S. cash outflow Debit
Italy.
The Mexican government pays a U.S. consulting
U.S. cash inflow Credit
firm for consulting services provided by the firm.
The Home Depot headquarters in the United
States purchases lumber from Canada that it U.S. cash outflow Debit
uses in assembling kitchen cabinets.
A university bookstore in Ireland purchases
textbooks produced by a U.S. publishing U.S. cash inflow Credit
company.
A U.S. investor receives a dividend payment from
U.S. cash inflow Credit
a French firm in which she purchased stock.
The U.S. Treasury sends an interest payment to
a German insurance company that purchased U.S. cash outflow Debit
U.S. Treasury bonds one year ago.
Apple's foreign subsidiaries remit earnings to
U.S. cash inflow Credit
their U.S. parent.
