Credits and debitsSyllabus: Distinguish between debit items and credit items in the balance of payments.
Almost every transaction involves an exchange between two individuals of two items believed to be of equal value. Thus, if one person exchanges $20 for a baseball bat with another person, then the two items of equal value are the $20 of currency and $20 the value of the baseball bat. The debit and credit columns in the ledger are used to record each side of every transaction. This means that every transaction must result in a credit and debit entry of equal value.
By convention, every credit entry has a "+" placed before it while every debit entry has a "-". The plus on the credit side generally means that money is being received in exchange for that item while the "-" on the debit side indicates a money payment for that item. This interpretation in the balance of payments accounts can be misleading, however, since in many international transactions, as when currencies are exchanged, money is involved on both sides of the transaction. Simple rules of thumb to help classify entries on the balance of payments follows:
1) Any time an item (good, service or asset) is exported from a country, the value of that item is recorded as a credit (+) entry on the balance of payments,
2) any time an item is imported into a country, the value of that item is recorded as a debit (-) entry on the balance of payments.
The balance of payments is a record of all financial flows between a country and the rest of the world. These flows are recorded as either credits or debits.
A credit item on the balance of payments is any financial flow that leads to money entering the country.
A debit item on the balance of payments is any financial flow that leads to money leaving the country.
Credit items will include any item where money enters the country. It is important to think of a credit as the money entering the country. For example, one of the principal credit items is exports. In the case of exports, the goods leave the country to be sold overseas, but the money enters the country. Exports are therefore a credit item. Credit items therefore include:
- Export receipts
- Current transfers into the country
- Capital transfers into the country
- Direct and portfolio investment into the country
In the same way, debit items will include:
- Imports payments
- Current transfers out of the country
- Capital transfers out of the country
- Direct and portfolio investment out of the country
Net: You find this used throughout economics
The term net in the balance of payments accounts is used to refer to the net of credits and debits. e.g. if credits are $5,000 and debits are $4,000 then the net figure is +$1,000. eg If exports are $100bn and imports are $80bn then how mnauch are net exports?
Structure of the balance of payments
While the structure of the balance of payments may vary from country to country, a working version of the
structure (and components) of the balance of payments is given below and must be used by DP economics
students for the purposes of the curriculum and assessment.
• Balance of trade in goods
• Balance of trade in services
• Current transfers
• Capital transfers
• Transactions in non-produced, non-financial assets
• Direct investment
• Portfolio investment
• Reserve assets
Current account = capital account + financial account + errors and omissions
This is specified in the IB Economics Guide (final page Appendix) so your task is to be able to define, explain and give examples of each item in each account.