Sources and uses of funds

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The balance of payments is a sources-and-uses-of-funds statement reflecting changes in assets, liabilities, and net worth during a specified period. Transactions between domestic and foreign residents are entered in the balance of payments either as debits or credits. In other words, balance-of-payments statistics are gathered on a single-entry basis.

In dealing with the rest of the world, a country earns foreign exchange on some transactions and expends foreign exchange on others. Transactions that earn foreign exchange are often called credit transactions and represent sources of funds. These transactions are recorded in the balance of payments as credits and are marked by plus signs (+). The following transactions represent credit transactions:

1 Exports of goods and services.

2 Investment and interest earnings.

3 Transfer receipts from foreign residents.

4 Investments and loans from foreign residents.

Transactions that expend foreign exchange are sometimes called debit transactions and represent uses of funds. These transactions are recorded in the balance of payments as debits and are marked by minus signs (—). The following transactions represent debit transactions:

1 Imports of goods and services.

2 Dividends and interest paid to foreign residents.

3 Transfer payments abroad.

4 Investments and loans to foreigners.

We can apply these elementary principles to the recording of transactions in the balance of payments. Some hypothetical transactions may illustrate this single-entry approach.

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