Balance of payments
2.1. Broadly speaking, the Australian balance of payments (1) is a statistical statement designed to provide a systematic record of Australia’s economic transactions with the rest of the world. It may be described as a system of consolidated accounts in which the accounting entity is the Australian economy and the entries refer to economic transactions between residents of Australia and residents of the rest of the world (non-residents).
1. Although the terminology is now too deeply embedded in international and local usage to be changed, the term balance of payments is a misnomer in two major senses.
2.2. Balance of payments statements cover a wide range of economic transactions which include:
First, it suggests that the accounts are concerned only with payments. In fact their scope is a good deal broader, and they include economic transactions during a period that give rise to a payment in an earlier or later period, e.g. goods may change ownership in one period, but payment may be made in an earlier period (pre-payment) or in a later period (trade credit). They also include transactions for which there may never be a payment, e.g. goods shipped under foreign aid or goods shipped between related enterprises.
Second, the term implies a single balance. In reality the balance of payments is a system of accounts in which many balances can be derived, such as the balance of goods and services, the balance on current account, and the balance on capital and financial account.
- goods, services, income and current transfers; and
The first category is shown in the current account and the second category in the capital and financial account.
- capital transactions, such as capital transfers, and financial transactions involving Australian claims on, and liabilities to, non-residents.
International investment position
2.3. Australia’s international investment position is a closely related set of statistics. It can be viewed as the balance sheet recording Australia’s stock (or level) of foreign financial assets and liabilities at a particular date. The net international investment position is the difference between the stock of foreign financial assets and foreign liabilities at a particular date.
2.4. Viewed more broadly, the international investment position reconciles the stock of investment at two different points in time by showing financial transactions and other changes (non-transaction changes) such as price changes, exchange rate variations and other adjustments that occurred during the period. This is also referred to as a reconciliation statement. Financial transactions which are included in the reconciliation statement are equivalent to the transactions measured in the financial account of the balance of payments. This is illustrated in diagram 2.1 which shows the relationship between the balance of payments and international investment position statements. The column of the diagram shows the accounts of the balance of payments, while the row shows the international investment position. Common to both row and column is the financial account of the balance of payments (called simply ‘transactions’ when presented in an international investment position format). This financial account shows, for the relevant accounting period, the financial transactions which arise from or are the counterparts to the transactions in the current and capital accounts. Correspondingly, it also reflects the change in Australia’s international investment position over the reference period due to those financial transactions.
2.5. Classifications such as assets and liabilities, type of investment (direct, portfolio and other investment and reserve assets), and instrument of investment, are used consistently in both the balance of payments and the international investment position.
2.1 RELATIONSHIP BETWEEN THE BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION