Purchases of products and services are not always restricted within the borders of a single country. As consumers in one country transact with businesses in other countries, the balance of payments (BOP) keeps a record of the exchanges (Eiteman, Stonehill, & Moffett, 2010). For example, a purchase made in the United States (U.S.) for Chinese-made goods would be considered an export to China and an import to the U.S. even if it is purchased by a consumer in his hometown. In order to complete this transaction, an exchange of goods, services, or money between the U.S. and China must be made. Considering the U.S.-China example, in theory the U.S. BOP account would record an increase in U.S. merchandise imports and China would consider it as a merchandise export in its BOP account (Eiteman et al., 2010).
This paper will address the relevant data included in the BOP accounts used by different entities to make decisions. It will also include an assessment of the main reporting agency and its role in reporting statistical information worldwide. Finally, it will address the various types of foreign exchange exposure linked with the BOP.
Balance of payments data summarizes all international transactions for a country over a specified time period (Eiteman et al., 2010). Measurements included in the BOP can significantly impact decisions made by various governments, multinational companies, investors, and consumers alike (Eiteman et al., 2010). For example, governments use BOP data as they set economic policies, manage currency exchange and interest rates, and gauge their competitiveness in the global market (Eiteman et al., 2010). Global corporations make use of the data to determine the importance of specific trades and financial instruments in the market domestically and internationally to make operating and investment decisions and to set prices (Eiteman et al., 2010). Additionally, BOP data impacts all consumers through the monetary policies implemented, employment decisions made, and levels in prices set as a result (Eiteman et al., 2010). BOP data can also provide insight into expectations for future growth or stagnation in a country signaling an area ripe for investing or withdrawal of funds (Eiteman et al., 2010). Ultimately, BOP data affords an opportunity to evaluate the trade, investment, and exchange rate policies of various countries for governments, companies, and consumers to make informed decisions (Eiteman et al., 2010).
Similar to a company’s balance sheet, a country’s “BOP must balance” (Eiteman et al., 2010, p. 80). Without proper balance, an accounting error has occurred (Eiteman et al., 2010). The specific subaccounts of the balance of payments for each country may differ, just as the accounts on a company’s balance sheet may differ, but they broadly include major subaccounts such as the current account, capital account, and financial account (Eiteman et al., 2010).
A country’s current account tracks...