I know that when we sell some goods abroad, we credit Goods&Services part within Trade balance, which is a part of Current Account.
What part of the Financial Account is debited with the sum received for the exported goods?
$\begingroup$
$\endgroup$
$\begingroup$
$\endgroup$
It is recorded under the "Other investment" of the Financial Account.
The BPM6, Chapter 6 divides the Financial Account into five portions:
- Direct investments.
- Portfolio investments.
- Financial derivatives (other than reserves) and employee stock options.
- Other investment.
- Reserves.
"Other investment" (p. 111, BPM6) sounds unimportant , but is actually where payments for exports and imports are (usually) recorded, because this category includes: currency and deposits; loans; and trade credit and advances.
Example. A US farm exports \$100 worth of beef to a Japanese supermarket. The Japanese supermarket pays \$100 and this is deposited into the US farm's bank account.
From the American perspective, the export is recorded as a credit (+) under Current Account: Exports. And the payment is recorded as a debit (-) under Financial Account: Other investments.
Conversely, from the Japanese perspective, the import is recorded as a debit (-) under Current Account: Exports. And the payment is recorded as a credit (+) under Financial Account: Other investments.
$\begingroup$
$\endgroup$
The question refers to the double-entry bookkeeping principle used in balance of payments accounting. Each transaction must appear twice in the balance of payments, once as debit and once as a credit.
An imported good can be paid for by (1) transferring money from a bankaccount in the importing country to a bank account in the exporting country, (2) cash can be transferred or (3) the importing country may be incurring a liability (the obligation to pay for the goods), while the exporting country acquires an asset (the receiving of a future payment).
These transactions are, without any doubt, registered somewhere in the financial account. I am not entirely sure, but I believe all three situations would be registered as portfolio investments.
The sixth IMF BoP manual says the following:
For example, the corresponding entry for an export of goods is usually an increase in financial assets, such as currency and deposits or trade credit.
-
$\begingroup$ Portfolio investment consists of equity and debt securities that are not classified to either direct investment or reserve assets. Payments for goods and services not part of financial accounts. $\endgroup$ – london Dec 7 '15 at 20:57
-
$\begingroup$ Exporting a product gives rise to a claim on the importer. This is an asset and occurs in the financial account. For the importer, the obligation to pay is a liability and also appears in its financial account. The same holds for both parties when the payment is done cash or via bank transfer. Consider the case without this "offsetting" entry: the accounting identity of the BoP would not be fulfilled. I refer for example to "International economics: theory and policy" by Krugman and Obstfeld, or "Principles of Internationial Finance and Open Economy Macroeconomics" by Cristina Terra. $\endgroup$ – Wecon Dec 7 '15 at 22:35
-
$\begingroup$ Okay. In your original post, you said "received" now you are saying "liability" and in this post you mentioned "portfolio investment". Yes, if it is a trade credit you are referring to, it is recorded in financial accounts. For example, when an exporter sells goods to a nonresident, they record a trade credit claim in financial accounts if payment is expected to be made later. But, the exporter will still receive the "exports" in current account balance offset by "trade credit claim" in financial accounts. $\endgroup$ – london Dec 8 '15 at 18:18
-
$\begingroup$ Both in my original post and my comment I make the same points: (a) an export leads to receiving a (future) payment, and (b) an import requires (the future) paying for the import. (a) is an acquisition of an asset, (b) is an incurrence of a liability. a and b are registered in the FA of the exporter and importer respectively. I also state that this transaction occurs in the FA regardless how it is settled: via bank accounts, cash or credit. (1) and (2) in the original post are also acquisitions of assets or incurring of liabilities. Do you agree? $\endgroup$ – Wecon Dec 8 '15 at 23:18
-
$\begingroup$ Okay, my friend, if you look at the other answers, you will realise that not only me who got confused reading your question. in any case, keep learning. $\endgroup$ – london Dec 9 '15 at 15:46
$\begingroup$
$\endgroup$
The physical part of trade in goods and services is recorded in the Current Account and the payment (with financial assets) part of the transaction is recorded in the Financial Account. The Balance of Payments should be 0 after you sum up the Current Account balance, the Capital Account and the Financial Account balances. The trade in goods and services is recorded in Current Accounts. For instance, exports are credited and imports are debited.
$\begingroup$
$\endgroup$
I'm not quite sure what you're asking here. Trade in goods and services is not included in the financial account which consists of (as per BPM6) direct investments, portfolio investments, derivatives, other investments and reserve assets.
$\begingroup$
$\endgroup$
I'm not also quite sure about what you're asking here. When we sell some goods abroad, we credit Goods&Services part within Trade balance with the sum received for the exported goods. We credit the values of trade in dollars, not the quantities. There is not necessarily a counterpart in the Financial Account. For instance, a trade relationship within the eurozone is priced in euros and does not affect the partner's financial account.
As explained in the Chapter 13 of the Krugman, Obstfeld, Melitz, International Economics.
Transactions that arise from the export or import of goods or services and therefore enter directly into the current account. When a French consumer imports American blue jeans, for example, the transaction enters the U.S. balance of payments accounts as a credit on the current account.
Note that in this example, as pointed out by @denesp, a euro/dollar trade could be needed. This will affect the financial account as well. However, trade is operated by large (multinational) firms, which have bank accounts in the major currencies such as USD and euro.
-
$\begingroup$ In case of such an import a euro/dollar trade is needed as well. (Unless the French consumer already had dollars for some reason.) Does this not affect the financial account as well? $\endgroup$ – Giskard Dec 7 '15 at 16:36
-
$\begingroup$ Right. Thanks @denesp. I edited my answer to be more precise. $\endgroup$ – emeryville Mar 19 '16 at 21:37
