Introduction to the Balance of Payments (BOP)

Balance of Payments (BOP) is a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world. Transactions consist of those involving goods, services and income, those involving financial claims on, and liabilities to, the rest of the world, and those classified as current or capital transfers. Closely related to the flow-oriented Balance of Payments framework is the stock oriented International Investment Position (IIP). Compiled at a specific date, this investment position is a statistical statement of (i) the value and composition of the stock of an economy’s financial assets, or the economy’s claims on the rest of the world, and (ii) the value and composition of the stock of an economy’s liabilities to the rest of the world. Looking at the difference between the assets and the liabilities in the IIP provides a measure of the net position of the economy. A change in stocks during any defined period can be due to transactions (flows), to valuation-changes reflecting changes in exchange rates or prices, or to other adjustments. By contrast, BOP accounts reflect transactions only. Together the BOP and the IIP give a good description of a country’s or an economy’s external position. And because of the relationship between the external and domestic economic developments, the BOP is an important tool when analyzing a country’s economic position. The net international investment position, (external financial assets minus external liabilities,) is often used to analyze the performance and trend in an economy compared to the rest of the world. If the assets are bigger than the liabilities, the economy is a net creditor, and vice versa if the liabilities are bigger than the claims, the country is a net debtor.