Understanding the International Balance of Payments

This time we will discuss the meaningof the international balance of payments and its components. Here’s the explanation …

 

Table of contents :

Understanding the International Balance of Payments

  1. Debt Transactions
  2. Credit Transactions

International Balance of Payments Components

  1. Trade Transactions (Trade Account)
  2. Capital Income Transactions (Income on Investment)
  3. Unilateral Transaction (Unilateral Transaction)
  4. Direct Investment Transactions

6.Long Term Loan Transactions

  1. Short Term Capital Transactions
  2. Monetary Traffic Transactions (Monetary Acomodating)

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Understanding the International Balance of Payments

International balance of payments ( Balance of Payment ) is a systematic structured record of all international economic transactions carried out by residents of a country with residents of other countries within a certain period of time, usually 1 year.

 

The definition of population in the international balance of payments includes individuals, legal entities, and governments.

 

International economic transactions that are recorded in the international balance of payments can be classified into two, namely debit and credit transactions.

 

Debit transactions are transactions that create an obligation for residents of one country to make payments to residents of another country.

 

Meanwhile, credit transactions are transactions that give rise to the right for residents of one country to receive payments from residents of another country.

 

The balance of payments has two sides, namely credit and debit.

 

  1. Debt Transactions

Transactions that result in an increase in the obligation for residents of a country with a balance of payments to make payments to residents of another country.

 

Example : Indonesia buys services from Malaysia, so the transaction creates an obligation to make payments to Malaysia, so a service transaction is a debit transaction that is recorded on the balance of payments with a minus sign (-).

 

  1. Credit Transactions

Transactions that result in arising or increasing the right of residents of a country with a balance of payments to receive payments from other countries.

 

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Example : Indonesia sells services to Malaysia, then the transaction creates the right to receive payments from Malaysia, then the transaction is a credit transaction recorded in the balance of payments with a positive sign (+).

 

International Balance of Payments Components

understanding of the international balance of payments

 

With a balance of payments one can find out that the balance sheet is divided into several international economic transactions.

 

In general, international (foreign) economic transactions or basic items of a country can be distinguished as follows.

 

  1. Trade Transactions (Trade Account)

Trade transactions are all export and import transactions for goods and services. Trade transactions are divided into visible transactions, namely export and import transactions of merchandise.

 

And service transactions (invisible trade), which are export and import service transactions. Export transactions are recorded on the credit side, while import transactions are recorded on the debit side.

 

  1. Capital Income Transactions (Income on Investment)

Capital income transactions are all income or income transactions originating from foreign investment and foreign capital income receipts in the country.

 

This income can be in the form of interest, dividends and other benefits. Interest income and dividends are credit transactions, while payments of interest and dividends for residents of foreign countries are debit transactions.

 

  1. Unilateral Transaction (Unilateral Transaction)

Unilateral transactions are unilateral transactions or transactions that run in one direction, meaning that the transaction does not create an obligation to pay for goods or assistance that has been provided.

 

The following is included in a one-sided transaction:

 

gift (gift)

aid (aid)

unilateral transfer

If a country gives gifts or favors to another country, this transaction is called a debit transaction.

 

And vice versa, if a country receives a gift or assistance from another country, it is called a credit transaction.

 

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  1. Direct Investment Transactions (Direct Investment)

Direct investment transactions are all transactions relating to the sale and purchase of shares and the sale and purchase of a company made by residents of a certain country with residents of another country.

 

If there is a purchase of shares or a purchase of a company from the hands of a resident of another country, the investment item is directly debited.

 

And if there is a sale of shares or a foreigner who founded a company in the territory, then this post is located on credit.

 

  1. Long-Term Debt Transactions (Long Term Loan)

Long-term debt transactions are all credit transactions that have a long period of time, namely payments of more than one year.

 

For example, namely the sale of bonds to residents of other countries, and receiving repayments of long-term loans that have been loaned to residents of other countries.

 

Or obtaining long-term loans from other countries, then this item is recorded next for credit, and if the item is located next to the debit,

 

transactions that occur are transactions that will buy bonds or other transactions related to long-term debt.

 

7 . Short Term Capital Transactions

Short-term accounts receivable transactions are all transactions in debt with maturities of not more than one year.

 

These transactions are divided into two, namely: withdrawals and money orders.

 

  1. Monetary Traffic Transactions (Monetary Acomodating)

Monetary traffic transactions are activities for payment transactions in current accounts (trade transactions, capital income, and unilateral transactions).

 

And investment accounts (direct investment transactions, short-term debt and long-term debt).

 

If the amount spent on the current account and investment account is greater than income, then the difference is the deficit that must be covered, that is, with monetary acomodating credit balances.

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