BALANCE OF PAYMENTS
The balance of payments is a statistical statement that systematically summarises economic transactions of a country conducted over a specific time period with the rest of the world. The period is usually a month, a quarter or a year.
Balance of payments
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reflects the formation of gross domestic product (GDP), gross national product (GNP) and gross domestic income (GDI) from the external economic activity on current account; |
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reflects structure of external financial sources on capital account, financial account and reserves; |
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helps to evaluate international economic position and compare it with other countries; |
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helps to explain underlying reasons of changes in foreign exchange reserves; |
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is an underlying document in taking monetary and economic policy decisions. |
The current account is divided into four account: goods, services, income and transfers. The goods and services accounts include all all sums receivable from selling goods and services as well as the sums payable for purchases. The income account reflects revenues related to the use and render for use of production factors (capital and labour). Transfers are all the remaining transactions related to the formation of gross disposable income of residents and are distinguishable from capital transfers.
Sources of financing are divided between three accounts: the capital account, financial account and reserve assets. The capital account records mainly mainly transactions related to intangible assets (e.g. the acquisition/disposal of intellectual property), debt forgiveness, and international capital transfers not related to the formation of gross disposable income. The financial account records foreign investment classified into four major categories: direct investment, portfolio investment, financial derivatives, and other investment. In Estonia, reserve assets reflect changes in the gold and foreign exchange reserves of the central bank.
A balance of payments transaction is for the most part a transaction between a resident and a non-resident. The balance of payments is compiled on an accrual basis, i.e. the transaction is recorded at the time the transaction was concluded between parties or a change of ownership took place, regardless of whether the respective amount has actually been received or paid. All balance of payments transactions are recorded at market prices.
The double entry system serves as the basis for compiling the balance of payments. Every recorded transaction is represented by two entries with equal values, but with different arithmetic signs: credit (+) and debit (-). Credit reflects an increase in the financial resources available while debit reflects their utilisation
A methodological base for the compilation of the balance of payments is the IMF Balance of Payments Manual 5th Edition.
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