O 32 Balanceof Payments Accounts

The balance of payments identifies transactions along functional lines. The International Monetary Fund (IMF) classifies balance-of-payments transactions into five major groups:

A The current account: merchandise, services, income, and current transfers. B The capital account: capital transfers, nonproduced assets, and nonfinancial assets. C The financial account: direct investments, portfolio investments, and other investments. D Net errors and omissions. E Reserves and related items.

We can classify balance-of-payments transactions into several different groups. However, it is important to note that a country interacts with other countries in two ways. First, it buys and sells goods and services in world product markets. Second, it buys and sells financial assets in world financial markets. You could use your $3,000 to buy a personal computer from Toshiba, but instead you could use that money to buy stock in the Toshiba Corporation. The first transaction would represent a flow of goods, while the second would represent a flow of financial assets. Here we discuss these two activities and the close relationship between them.

The IMF format in table 3.1 below is regarded as useful for analyzing balance-of-payments developments in a uniform manner. In other words, the format facilitates a variety of analytic perspectives. Each of the five major data categories has a name and a particular analytic use. Table 3.1 also shows data codes, which are used by the IMF and other international organizations to facilitate international data reporting.

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