International economics

Table of Contents

1. Topic pack - International economics - introduction
2. Section 3.1 International trade (notes)
3. Section 3.1 International trade (questions)
4. Section 3.1 International trade - simulations and activities
5. Section 3.2 Exchange rates (notes)
6. Section 3.2 Exchange rates - questions
7. Section 3.2 Exchange rates - simulations and activities
8. Section 3.3 Balance of payments - notes
   1. BOPs - introduction
   2. Credits and debits
   3. Current account
   4. Capital account
   5. Financial account
   6. Relationship between accounts
   7. Balance of payments - calculation
   8. Current account & floating exchange rate
   9. Current account & fixed exchange rate
   10. Balance of payments problems
   11. Consequences of deficit / surplus
   12. Policies to correct a balance of payments disequilibrium
   13. Consequences of a financial account deficit / surplus
   14. Marshall-Lerner condition
9. Section 3.3 Balance of payments - questions
10. Section 3.4 Economic integration - notes
11. Section 3.4 Economic integration - questions
12. Section 3.5 Terms of trade - notes
13. Section 3.5 Terms of trade - questions
14. Print View

Credits and debits

Syllabus: 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,

and

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.

Detailed explanation

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.

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