The balance of payments is an accounting document that systematically records the set of economic transactions of a country with the rest of the world during a specific period, generally a year. As in any accounting document, the “double entry” method is used and the balance is zero (debit side = credit side; outputs = inputs).
The balance of payments is divided into several sub-balances or accounts, according to the nature of the transactions registered: Current, capital and financial. The difference between revenues and payments of a certain account is called the account balance, which can be a surplus (revenues exceed payments), balance (revenues are equal than payments) or a deficit (payments exceed revenues).
The current balance includes the transactions of current goods and services that are carried out. It is subdivided into four basic balances:
- Balance of goods (trade balance): It includes the purchase and sale of goods.
- Balance of services: Services transactions such as tourism and travel, transport, communications, construction, insurance, computer services… are registered.
- Income balance: In this case, revenues are the income received by the owners of the factors (labour and capital) used abroad, while payments are the income that is sent to foreigners who are owners of productive factors used in our country.
- Balance of (current) transfers: Includes current transfers between residents and non-residents.
The capital account includes capital transfers and transactions related to real investments and includes, among others, capital transfers from the national public administrations with the European Union, for instance.
The financial account records transactions of a financial nature, such as direct portfolio investments, other financial investments… In short, the financial account is mainly the financial counterpart to the transactions of the real economy represented in the current and capital accounts.
