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DEFINITIONS AND CONCEPTS
BALANCE OF PAYMENTS
The Balance of Payments (BoP) is a statistical statement which systematically records economic transactions between residents of Australia and non-residents (ie residents of other countries). It tells us what we buy from and sell to the rest of the world, and what we earn (and pay) for the labour and financial capital that is provided across our borders, as well as measuring those financial flows.
Balance of Payments transactions occur when resources, real or financial, are provided by/to Australia to/from the rest of the world.
For Balance of Payments accounting:
Balance of payments statements cover a wide range of economic transactions which are divided into three broad accounts:
INTERNATIONAL INVESTMENT POSITION
The International Investment Position (IIP) is the balance sheet recording Australia's stock (also called level, or position) of foreign financial assets and liabilities at a particular date. The IIP tells us what debts Australia owes to the rest of the world, what equity investment the rest of the world has in Australian businesses, and Australia's debt and equity claims on the rest of the world.
Net International Investment Position is the difference between Australia's stocks of foreign financial assets and liabilities at a particular date.
The relationship between the BOP and the IIP is shown through a reconciliation statement, which takes the IIP at the beginning of a period, adds the BOP financial account transactions during the period, and adds various non-transaction changes during the period (such as the effects of price changes and exchange rate changes) to arrive at the IIP at the end of the period.
This is a diagram representing the relationship between the financial account of the Balance of Payments and the International Investment Position statement.
DOUBLE-ENTRY RECORDING SYSTEM
A double-entry recording system is used in compiling the balance of payments statistics. This means that for each credit entry there is an off-setting debit entry of the same value, and vice versa.
Most economic transactions have two sides: something of economic value is provided and something of equal value is received, and both flows are recorded. By convention, when Australia provides something to the rest of the world a credit entry is recorded; and when Australia receives something from the rest of the world a debit entry is recorded.
For example, when an exporter sells (provides) goods to a non-resident, the exporter may receive cash (a financial asset) in return. The export is represented by a credit entry and the financial asset received by the non-resident is represented by a debit entry.
Where a real resource (good or service) or financial item is provided without something of economic value being received in exchange (that is, without a quid pro quo), the double entry system requires an offset to be imputed (called a transfer entry) of equivalent value. For example, food exported as aid is reported as a credit entry in exports, and because there will be no payment for the food aid, an imputed debit current transfer is created as the offset.
These are examples of the double-entry recording system
Under the double-entry recording system, in theory the sum of all credit and debit entries must be zero. In practice, some transactions are not measured accurately (errors) and some are not measured at all (omissions). To restore the equality of credit and debit entries, a net errors and omissions item is included in the balance of payments. During any given period, the net effect of errors and omissions can be either positive or negative.
SIGN CONVENTION USED FOR BOP STATISTICS
The sign convention used in presenting balance of payments statistics is to give no sign (an implied positive sign) to credit entries, and a minus sign to debit entries. Similarly, balances or items which are net credits have no sign, while balances or items which are net debits have a negative sign. Through using this sign convention consistently, debits and credits, or assets and liabilities, need only be added to arrive at the relevant balance.
In principle, transactions and position statistics are valued at market prices. The market price is the amount of money that a willing buyer pays to acquire something from a willing seller, when the exchange is between independent parties who are entirely motivated by commercial considerations.
However, where market price valuations are not available, the transaction price, the amount recorded in the accounts of the transactors, is considered the closest practical approximation to market price. For transaction prices between related parties such as a head office and its subsidiaries, where taxation or other considerations apply, the transaction price may not be a good approximation to market price and some adjustment may be needed.
Australian balance of payments and international investment position statistics are expressed in Australian dollars even though many transactions and assets and liabilities are denominated in foreign currencies. Transactions denominated in a foreign currency are converted to Australian currency at the market exchange rate (mid-point of the buy and sell rates) at the time the transaction occurs. Asset and liability positions data are converted at the mid-point of the buying and selling market exchange rate at the reference date.
TIME OF RECORDING OF TRANSACTIONS
The time of recording of transactions in the balance of payments statistics is, in principle, the time of change of ownership.
Change of ownership occurs when the legal ownership of goods changes, when services are rendered and when income accrues. In the case of transfers, those which are imposed by one party on another are recorded at the moment when the transactions or other flows occur that give rise to the liability to pay; other transfers are recorded at the time of the ownership change for the goods, services, etc.
For financial transactions, the time of change of ownership is when the transactions are entered in the books of the transactors.