Principles of Compilation

The principles underlying the construction of balance of payments accounts are consistent with those used in the United Nations’ A System of National Accounts (SNA).³ There are, however, differences between the classification scheme used in the “rest-of-the-world” segment of the SNA and in the balance of payments accounts. In particular, the balance of payments accounts are based on a classification scheme that is more suited to the analysis of imbalances with the rest of the world than the broad breakdown between production, consumption, and accumulation that is used in the SNA.

The Manual (page 7) defines the balance of payments as “a statistical statement for a given period showing (a) transactions in goods, services, and income between an economy and the rest of the world, (b) changes of ownership and other changes in that economy’s monetary gold, special drawing rights (SDRs), and claims on and liabilities to the rest of the world, and (c) unrequited transfers and counterpart entries that are needed to balance, in the accounting sense, any entries for the foregoing transactions and changes which are not mutually offsetting.”

This definition emphasizes the scope of the balance of payments and the type of transactions covered. The reference to a given period indicates that the balance of payments deals with “flow” rather than “stock” data. Most transactions are exchanges whereby a transactor (economic entity) provides an economic value to another transactor and receives in return an equal value. The things that are considered to have economic value may be categorized broadly as real resources (goods, services, income) and financial items. In cases where items are given away, the offsetting entry to the real or financial flow is recorded in the balance of payments under the heading “unrequited transfers.” In previous editions of the Manual, valuation changes were excluded from the balance of payments, but the fourth edition calls for supplementary information on changes in the value of reserves. The method used is to show the change in reserves due to transactions as the algebraic sum of the total change in holdings and the counterpart items that represent offsets to those changes that could be labeled “reserve creation/destruction.”⁴ The latter have become much more common with the introduction of SDRs and the advent of widespread floating exchange rates. In addition to international exchanges, transactions in financial assets between residents or between foreigners may, under certain circumstances, be recorded in the balance of payments. For example, the sale by a private resident to the monetary authorities of a claim on a nonresident should be so recorded. By convention, shifts in a country’s international investment position emanating from changes in territory are excluded from the balance of payments, although transfers of real and financial assets arising from migration are included.

The Manual contains specific recommendations on the nature of the system to be employed in constructing the balance of payments statement, on the delimitation of an economy and the principles to be followed with respect to the time of recording, and on the valuation of transactions.

The balance of payments recording system takes the form of a double-entry accounting statement, in which each transaction is reflected in both a credit and a debit entry. According to the Manual (page 9), “Under the conventions of the system, the compiling economy records credit entries (a) for real resources denoting exports and (b) for financial items reflecting either a reduction in the economy’s foreign assets or an increase in its foreign liabilities. Conversely, the compiling economy records debit entries (a) for real resources denoting imports and (b) for financial items reflecting either an increase in assets or a decrease in liabilities.”

The balance of payments accounts are an “open system,” since only the resident aspects of external transactions are recorded. In contrast, the national accounts represent a “closed system,” as it records the transactions of the rest of the world as well as those of the domestic sectors.

Following the convention that credits are indicated by a positive sign and debits by a negative sign, the sum of all entries should be zero. Information on the debit and credit components of a transaction is, however, usually obtained from different statistical sources. Deficiencies in coverage, as well as variations in the time of recording and in the methods used for valuing transactions, often necessitate the insertion of a balancing item in the accounts. This is usually referred to as net errors and omissions, with the net emphasizing that the heading covers a balancing item between errors on both sides of the accounts.

Development of internationally consistent accounts necessitates guidelines for the scope of the domestic economy and for the definition of residency. In general, an individual or institution is considered a resident of the economy with which it has a “closer association … than with any other territory” (the Manual, page 2) or where its center of interest lies. Chapter 3 of the Manual provides some guidelines for decisions on residence.

• 1. General government. The residents of a country include not only its central, state, and local governments but also its embassies, consulates, and military establishments abroad.⁵

• 2. Individuals. Most of the individuals in an economy on a permanent basis would be considered residents of that country. Tourists and other visitors and workers who are in an economy for less than one year are considered residents of their home country. Diplomatic, military, and other official representatives of foreign governments (together with their dependents) are not considered part of the host country’s economy. Border workers (persons who regularly work in one country but live in another) are residents of the economy where they live and not where they work.

• 3. Enterprises. An enterprise is considered a resident of the economy in which it engages in business activity even if it is a branch or subsidiary of a foreign company. Balance of payments accounts may therefore involve the notional division of a single legal entity, with consequent problems of imputing a value for transactions between the parent and its affiliates.

Internationally comparable balance of payments accounts must be based on consistent definitions of the timing and valuation of transactions. The principle is adopted that “transactions are to be recorded when the real resources or financial items involved undergo a legal change of ownership, which [by convention] is taken to be the time that the parties concerned enter the transactions in their books” (the Manual, page 3). This approach contrasts with alternative principles, such as the time of contract or customs clearance, and may also differ from the timing convention used in an exchange record in compiling statistics on the flow of real resources. As indicated in the section below on Major Sources of Data, it may be necessary to make timing adjustments to data taken from the original statistical sources.

Transactions should be valued at the market price, which is defined as the “price that a willing buyer pays to a willing seller, when the buyer and seller are independent parties whose only considerations are commercial ones” (the Manual, page 2). These conditions are not fulfilled, however, for several types of transactions. For example, transactions between affiliated enterprises are not between independent parties, and international differences in taxation or regulation may provide incentives for the use of unrealistic pricing as a means of transferring profits between countries. A further problem arises for unrequited transfers that are not commercial transactions and that by definition do not have a price. Similarly, a price needs to be imputed for barter transactions. Prices in comparable markets or costs of production may provide some guidelines when prices have to be imputed.

As balance of payments transactions are conducted in a variety of currencies, currency conversions are necessary to present accounts in terms of a single unit of account. Moreover, a universal unit of account is needed to facilitate intercountry comparisons and to permit aggregations on a regional or worldwide basis. Transactions should, in principle, be converted at the exchange rate applicable at the time a contract was made. In countries with multiple exchange rates, balance of payments transactions should theoretically be converted at the notional unitary rate that would apply if all transactions were channeled through an uncontrolled market. This would avoid including in the balance of payments the tax and subsidy transactions between residents that are implicit in multiple exchange rate schemes. The actual basis for currency conversions usually differs from these theoretical principles. For example, information as to the contract date may not be available, and some average of the exchange rates in the accounting period often has to be used. Also, the balance of payments compiler is often presented with data that for customs or other purposes has already been converted into local currency. The principles underlying this conversion may differ significantly from those required for balance of payments purposes.⁶

Classification of Items

Balance of payments transactions are broken down into the standard components shown in Table 1. The classification attempts to distinguish variables responsive to particular economic forces and items that in terms of size or variability are likely to be important in several countries. These standard components may in turn be considered as building blocks that can be further grouped to aid in analysis of the balance of payments (see the section below on Analytic Breakdown). A broad distinction is made between current and capital account transactions.

Table 1.

Standard Components of the Balance of Payments

Source: International Monetary Fund, Balance of Payments Manual, 4th edition (Washington, 1977), pp. 66–69.Note: n.i.e = not included elsewhere.

Table 1.

Standard Components of the Balance of Payments

I. CURRENT ACCOUNT
				Credit	Debit
A. Goods, Services, and Income
	Merchandise
	Shipment
	Other Transportation
		Passenger services
		Port services, etc.
	Travel
	Investment Income
		Direct investment income
			Reinvested earnings
			Distributed earnings
		Other
			Resident official, including interofficial
			Foreign official, excluding interofficial
			Private
	Other Goods, Services, and Income
		Official
			Interofficial
			Other, resident official
			Other, foreign official
		Private
			Labor income, n.i.e.
			Property income, n.i.e.
			Other
B. Unrequited Transfers
	Private
		Migrants’ transfers
		Workers’ remittances
		Other
	Official
		Interofficial
		Other, resident official
		Other, foreign official
			II. CAPITAL ACCOUNT
A. Capital, excluding reserves
	Direct Investment
		Abroad
			Equity capital
			Reinvestment of earnings
			Other long-term capital
			Short-term capital
		In reporting economy
			Equity capital
			Reinvestment of earnings
			Other long-term capital
			Short-term capital
	Portfolio Investment
		Public sector bonds
			Assets
			Liabilities constituting foreign authorities’
			reserves
			Other liabilities
		Other bonds
			Assets
			Liabilities constituting foreign authorities’
			reserves
			Other liabilities
		Corporate equities
			Assets
			Liabilities constituting foreign authorities’
			reserves
			Other liabilities
	Other Capital
		Long-term capital
			Resident official sector
			Drawings and repayments on
			loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves
			Drawings and repayments on other
			loans received
			Other liabilities
			Deposit money banks
			Drawings and repayments on
			loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves: denominated in national currency
			Liabilities constituting foreign authorities’
			reserves: denominated in foreign currency
			Drawings and repayments on loans received
			Other liabilities
			Other sectors
			Drawings and repayments on
			loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves
			Drawings and repayments on other
			loans received
			Other liabilities
		Short-term capital
			Resident official sector
			Loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves
			Other loans received
			Other liabilities
			Deposit money banks
			Assets
			Liabilities constituting foreign authorities’
			reserves: denominated in national currency
			Liabilities constituting foreign authorities’
			reserves: denominated in foreign currency
			Other liabilities
			Other sectors
			Loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves
			Other loans received
			Other liabilities
B. Reserves
	Monetary Gold
		Total change in holdings
		Counterpart to monetization/demonetization
		Counterpart to valuation changes
	Special Drawing Rights
		Total change in holdings
		Counterpart to allocation/cancellation
		Counterpart to valuation changes
	Reserve Position in the Fund
		Total change in holdings
		Counterpart to valuation changes
	Foreign Exchange Assets
		Total change in holdings
		Counterpart to valuation changes
	Other Claims
		Total change in holdings
		Counterpart to valuation changes
	Use of Fund Credit
		Total change in holdings
		Counterpart to valuation changes

Source: International Monetary Fund, Balance of Payments Manual, 4th edition (Washington, 1977), pp. 66–69.Note: n.i.e = not included elsewhere.

View Table

Table 1.

Standard Components of the Balance of Payments

I. CURRENT ACCOUNT
				Credit	Debit
A. Goods, Services, and Income
	Merchandise
	Shipment
	Other Transportation
		Passenger services
		Port services, etc.
	Travel
	Investment Income
		Direct investment income
			Reinvested earnings
			Distributed earnings
		Other
			Resident official, including interofficial
			Foreign official, excluding interofficial
			Private
	Other Goods, Services, and Income
		Official
			Interofficial
			Other, resident official
			Other, foreign official
		Private
			Labor income, n.i.e.
			Property income, n.i.e.
			Other
B. Unrequited Transfers
	Private
		Migrants’ transfers
		Workers’ remittances
		Other
	Official
		Interofficial
		Other, resident official
		Other, foreign official
			II. CAPITAL ACCOUNT
A. Capital, excluding reserves
	Direct Investment
		Abroad
			Equity capital
			Reinvestment of earnings
			Other long-term capital
			Short-term capital
		In reporting economy
			Equity capital
			Reinvestment of earnings
			Other long-term capital
			Short-term capital
	Portfolio Investment
		Public sector bonds
			Assets
			Liabilities constituting foreign authorities’
			reserves
			Other liabilities
		Other bonds
			Assets
			Liabilities constituting foreign authorities’
			reserves
			Other liabilities
		Corporate equities
			Assets
			Liabilities constituting foreign authorities’
			reserves
			Other liabilities
	Other Capital
		Long-term capital
			Resident official sector
			Drawings and repayments on
			loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves
			Drawings and repayments on other
			loans received
			Other liabilities
			Deposit money banks
			Drawings and repayments on
			loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves: denominated in national currency
			Liabilities constituting foreign authorities’
			reserves: denominated in foreign currency
			Drawings and repayments on loans received
			Other liabilities
			Other sectors
			Drawings and repayments on
			loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves
			Drawings and repayments on other
			loans received
			Other liabilities
		Short-term capital
			Resident official sector
			Loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves
			Other loans received
			Other liabilities
			Deposit money banks
			Assets
			Liabilities constituting foreign authorities’
			reserves: denominated in national currency
			Liabilities constituting foreign authorities’
			reserves: denominated in foreign currency
			Other liabilities
			Other sectors
			Loans extended
			Other assets
			Liabilities constituting foreign authorities’
			reserves
			Other loans received
			Other liabilities
B. Reserves
	Monetary Gold
		Total change in holdings
		Counterpart to monetization/demonetization
		Counterpart to valuation changes
	Special Drawing Rights
		Total change in holdings
		Counterpart to allocation/cancellation
		Counterpart to valuation changes
	Reserve Position in the Fund
		Total change in holdings
		Counterpart to valuation changes
	Foreign Exchange Assets
		Total change in holdings
		Counterpart to valuation changes
	Other Claims
		Total change in holdings
		Counterpart to valuation changes
	Use of Fund Credit
		Total change in holdings
		Counterpart to valuation changes

Source: International Monetary Fund, Balance of Payments Manual, 4th edition (Washington, 1977), pp. 66–69.Note: n.i.e = not included elsewhere.

Current account transactions are divided into those for goods, services, and income and those for unrequited transfers. Usually, the major component of the former would be the merchandise item, which covers most balance of payments transactions in movable goods.⁷ In order to ensure consistency between the valuation shown for a merchandise export by one country and the corresponding import by another country, a rule has been adopted for the treatment of distributive services. The costs of distributive services performed up to the customs frontier of the exporting country are included in merchandise, while such expenditures incurred beyond that point are treated as shipment. In balance of payments terminology this means that exports and imports are recorded on an f.o.b. (free on board) basis. For imports, this contrasts with a c.i.f. (cost, insurance, and freight) basis, which would include all international freight and insurance up to a point of valuation at the customs frontier of the importing country.

Shipment covers freight, insurance, and other distributive services performed on goods classified as merchandise and on other movable goods. Consistent with the treatment of merchandise on an f.o.b. basis, shipment includes distributive services performed after the goods reach the customs border of the exporting country.⁸ Further, the convention is adopted that shipment of merchandise beyond the customs border of the exporting country is a service performed for a resident of the importing economy. When services up to the customs border are performed by residents of the importing country, offsetting entries are necessary under shipment. This would involve crediting the shipment account of the importing country and debiting that of the exporting country.

Other transportation is divided into passenger and port services. The former covers the international carriage of passengers in connection with travel, and the latter applies to goods and services, such as fuel and ships’ stores, acquired by carriers and consumed in their operation. Travel covers goods and services acquired by travelers, outside their own country, for their own use or for gifts. Travelers are persons such as businessmen, students, and tourists who remain for less than one year in an economy of which they are not residents.

Investment income covers factor earnings from financial assets, with dividends and interest payments usually representing the major items under this heading. Direct investment income is divided into reinvested and distributed earnings. The category for reinvested earnings reflects the view that undistributed income increases the capital participation of the parent company. Consequently, retained earnings are, in proportion to the direct investors’ participation in the equity of the enterprise, shown as direct investment income with a corresponding entry in the capital account. Investment income payments involving official institutions (including the International Monetary Fund) are shown separately from other private investment earnings.

Other goods, services, and income represent a residual category with a broad division made between official and private flows. Official flows cover such items as transactions between embassies abroad and the host country, aid services, and insofar as they can be quantified, military services.⁹ Private transactions would include labor income paid to seasonal and border workers and such items as income from patents and merchandise insurance.

Unrequited transfers provide offsetting entries for real and financial flows that do not involve a quid pro quo. For example, a gift of real resources to the compiling country is shown as a debit entry under merchandise imports and as a credit item under unrequited transfers. Private unrequited transfers include migrants’ transfers, workers’ remittances, and other. Migrants’ transfers represent the contra-entry to the shift in net worth of the migrant resulting from migration. Transfers of migrants’ goods from the old to the new place of residence would be shown as a merchandise export for the originating economy, with an offsetting debit entry under unrequited transfers. Similarly, unrequited transfers provide offsetting entries for the change in a nation’s financial assets and liabilities following migration. Unrequited transfers of income between emigrants and the compiling economy are included under workers’ remittances; if, however, the length of stay is less than one year, they would be classified as labor income under other goods and services. Official unrequited transfers include government grants of goods, financial resources, and technical assistance services.

The capital account covers transactions in financial assets and liabilities. In addition, for the reserves category it incorporates supplementary information on total changes in holdings, together with counterpart entries that offset those changes not due to transactions. Assets except monetary gold and SDRs represent claims on nonresidents, and liabilities represent indebtedness to nonresidents. Consistent with the principle that the balance of payments records transactions, assets and liabilities must represent changes in actual claims; unused lines of credit and other contingent obligations are not included. A debit entry can arise either from an increase in assets or a reduction in liabilities, while a credit entry reflects a decrease in assets or an increase in liabilities. In order to facilitate analysis, capital transactions are broken down by using several criteria: type of capital, length of maturity, and assets and liabilities. The functional breakdown represents reserves, direct investment capital, portfolio capital, and other capital. Reserves attempt to distinguish those assets that respond to movements in “autonomous” components of the balance of payments (see the section below on Analytic Breakdown). Direct investment covers assets and liabilities involving a lasting interest in an enterprise, while portfolio capital covers other long-term bonds and corporate equities. For all components, apart from direct investment, movements in assets and liabilities are shown separately. A distinction is also made between short-term and long-term capital, with the former having a maturity of one year or less and the latter a maturity of more than one year. This distinction is not, however, believed to be relevant for reserves; portfolio capital is long-term capital by definition. In previous editions of the Manual, considerable emphasis was placed on a sectoral breakdown of capital movements. Such a breakdown in the fourth edition is, however, provided only for “other capital,” with the sector to be identified as that of the domestic creditor for assets and that of the domestic debtor for liabilities. The sectoral breakdown covers the official sector, deposit money banks, and other holders, with liabilities constituting foreign authorities’ reserves being shown separately in each case.

Direct investment constitutes “investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise” (the Manual, page 136). Specific criteria for distinguishing direct investment are usually linked to the degree of foreign ownership and the amount of dispersion among the owners. In practice, the number of cases where it is difficult to decide whether investment should be classified as “direct” are few, because most such enterprises are wholly owned by foreigners. Also the quantitative importance of borderline cases is limited, as the Manual provides that only the direct investors’ share in the capital and income flows is to be classified as direct investment. The contra-entry to the reinvestment of earnings entered under direct investment income in the current account is reflected in the capital account as a distinct component of direct investment capital. Portfolio investment “covers long-term bonds and corporate equities other than those included in the categories for direct investment and reserves” (the Manual, page 142). A division is made between public sector bonds, other bonds, and corporate equities. “Other capital” represents a residual category.

Reserves are composed of “the monetary gold, special drawing rights (SDRs) in the Fund, reserve position in the Fund, use of Fund credit, and existing claims on nonresidents that are available to the central authorities either to finance payments imbalances directly or to manage the size of such imbalances by intervening to influence the exchange rate for the national currency” (the Manual, page 147). For the most part reserves would be held by the central authorities, although funds held by the deposit money banks, but subject to the effective control of the government, should also be included. Changes in the reserve position in the Fund (asset) are shown separately from the use of Fund credit (liability). As discussed in the section above on Principles of Compilation, reserve creation (through monetization or SDR allocations) and valuation changes are included as supplementary information with an offsetting (counterpart) entry.

International reserves usually represent the major component of net foreign assets in the monetary survey. The balance of payments shows changes in reserves—a flow figure—while the monetary survey shows the stock of net foreign assets. Also, there may be differences in the coverage of net foreign assets in the monetary survey and reserves in the balance of payments. In particular, the former includes foreign assets and liabilities of the deposit money banks that may not be considered reserves for the purpose of balance of payments classification. Problems that arise in reconciling the balance of payments and monetary survey data for international reserves often reflect different exchange rate conversions in the two sources. Furthermore, valuation changes are, in principle, included in net foreign assets in the monetary survey, with an offsetting change in unclassified liabilities. Prior to the fourth edition of the Manual, such valuation changes were not recorded in the balance of payments.

Major Sources of Data

The major sources of data for merchandise transactions are trade returns and foreign exchange records. Trade returns register the physical movement of commodities across borders, while foreign exchange records indicate payments and receipts for goods. Neither necessarily corresponds to the balance of payments principle for recording transactions at the time a change of ownership is indicated in the books of the buyer and the purchaser. Thus, adjustments for differences in coverage, classification, timing, and valuation may be required.¹⁰ Coverage adjustments to the exchange record are necessary in order to allow for transactions that are not settled through the banking system. Barter trade, unrequited transfers in kind, and transactions settled directly by changes in financial assets and liabilities held abroad are examples of items that would not be entered in exchange records. The inclusion of marine products caught by domestic vessels in the open sea and sold directly abroad represents an example of a coverage adjustment that should be made to trade data. Classification adjustments may be necessary in order to put transactions on an f.o.b. basis, with corresponding changes in the shipment account. Timing adjustments are likely to be particularly important when there are significant changes in the size of trade flows or when large stocks are held abroad by residents or held domestically by nonresidents. Trade returns register the physical movement of goods and should be adjusted for changes in these stocks. Timing adjustments need to be made to the exchange record to allow for prepayments and trade credits, with offsetting entries for the changes in assets and liabilities included in the capital account. Valuation adjustments are necessary when data from the basic source are not recorded at market prices. An example might be the recording of a special customs valuation in the trade returns.

Information on balance of payments transactions by financial institutions and the public sector should be readily available. Trade returns and exchange records may also provide information on other components of the balance of payments accounts. For example, trade returns may provide the basic data for “shipment” and for the stores and fuel component of “other transportation.” The exchange record provides information for all balance of payments components subject to exchange control, though significant classification problems may occur. Particularly for countries with limited exchange control, some private transactions may need to be estimated through the use of questionnaires and sample survey techniques. The travel component of the balance of payments is sometimes estimated by applying an average per diem expenditure to the number of days spent by residents abroad and by foreigners in the reporting country. Estimates of the per diem expenditure may be based on information obtained from travel agents, banks, hotels, or shops. A systematic record may be kept of the number of nights spent in hotels by foreign tourists. Information on tourism may in some cases be checked by an exchange of information between countries. Questionnaires may also be used to obtain information from shipping and airline companies on passenger fares and from multinational companies on investment income and direct investment. Company accounts may provide information on business transactions that should enter the balance of payments. Data on short-term capital flows are often considered to be particularly inaccurate. This reflects the problem of obtaining separate information on trade credits when exchange records are the basic data source or of obtaining a sufficient response from questionnaires in terms of coverage and reliability.

Analytic Breakdown

A major purpose of the balance of payments accounts is to provide an indication of the need for policy adjustment to rectify external imbalance. The double-entry accounting system implies, however, that the balance of payments must be in balance. A surplus or deficit in the balance of payments involves summing a subsection of total external transactions and distinguishing the transactions “above the line” from items “below the line.” The decision on where to draw the line reflects a normative view as to which set of transactions best indicates the need for balance of payments adjustment. One approach suggests that transactions undertaken for their own sake should be separated from transactions undertaken solely to compensate for these autonomous components. Another approach emphasizes the volatility of transactions, with items that are considered unstable being placed “below the line” in order to obtain an indication of the underlying balance of payments position. Unfortunately, no unambiguous criteria exist for distinguishing between autonomous and compensatory items because such a division essentially reflects the classifier’s view of the subjective motivation of the transactor. Nor is it easily possible to decide which types of financial assets are likely to be particularly volatile. It is therefore not surprising that a variety of concepts of balance have been developed.

The narrowest definition of payments imbalance relates to the trade balance—that is, the difference between exports and imports on an f.o.b. basis. A distinction between the flow of goods and the flow of services is, however, necessarily arbitrary, and the justification for this balance lies essentially in the ready availability of merchandise data from customs returns.

The current account represents a conceptually more interesting balance. This balance is sometimes represented by transactions on goods, services, and income, while other proponents suggest the inclusion of private, or all, unrequited transfers. Private unrequited transfers may be included on the grounds that, from the viewpoint of balance of payments adjustment, it is artificial to place labor income not included elsewhere above the line and workers’ remittances below the line. Official transfers are sometimes excluded on the assumption that they largely represent capital as opposed to current flows.¹¹ A problem with placing unrequited transfers below the line is that a gift of real resources would appear to worsen the balance of payments of the recipient country. The balance on goods, services, income, and unrequited transfers shows the net change in financial assets arising from an economy’s real transactions. Assuming that all transfers are current, this corresponds to the current surplus or deficit in the rest-of-the-world sector of the national accounts. It is questionable whether imbalances in the current account necessarily warrant policy adjustment. A developing country might, for example, wish to have a current account deficit financed by a long-term capital inflow linked to development expenditure. Alternatively, a country may wish to have a current account surplus in order to finance external investment.

The basic balance tries to indicate the longer-run balance of payments position by placing below the line transactions that are likely to be reversed in the short run. Long-term capital flows are included above the line, in addition to the current account items. The exclusion of short-term capital flows reflects the assumption that these are likely to be particularly unstable. It is, however, questionable whether this assumption is valid. Also, this balance may be sensitive to whether errors and omissions are placed above or below the line.¹²

The overall balance places below the line only changes in reserve assets and liabilities that serve to accommodate payments imbalances. This balance focuses on the use of reserves and the short-term constraints arising from limitations on the availability of financing. The decision on the items that constitute reserves raises certain problems, some of which were discussed in the section on Classification of Items. In particular, while monetary gold, SDRs, and assets of the monetary authorities would usually be included in reserves, the treatment of similar assets in deposit money banks is judgmental and depends on the degree of control the authorities have over the use of these assets. Further problems arise in the treatment of liabilities. Use of Fund credit is classified with reserves, and in some treatments liabilities considered by the holders as reserve assets are also placed below the line. This procedure has the advantage of providing international symmetry in the definition of balances. Some approaches also place below the line special transactions that represent sources of financing other than the use of reserve assets and the incurrence of reserve-related liabilities.

A special problem arises in applying the concepts of balance to a country such as the United States that acts as a “reserve center.” The liabilities of the United States are widely used for the purpose of settling international transactions and can thereby serve as reserves for other countries. It may be argued that reserve centers perform the role of financial intermediaries by lending on a long-term basis and providing short-term investments to foreign monetary authorities. To the extent that the latter transactions are classified below the line, there would be a corresponding overall deficit for the reserve center. Such a situation would not, however, necessarily warrant immediate policy adjustments by the deficit country. In part reflecting these problems, the United States in mid-1976 ceased publishing official balances on the grounds that they may be positively misleading, although balances are shown as memorandum items in the U.S. accounts. This official U.S. viewpoint emphasizes that while summary balances may have their uses, a full assessment of a country’s external position must be based on an analysis of the various components of the balance of payments in the context of developments in the domestic economy.