The total balance of international payments is customarily divided into three sections:
(1) The balance of international payments on current account.
(2) The balance of international payments on capital account.
(3) The movement of gold coins and bullion is sometimes shown separately in the third section.
(1) Balance of International Payments on Current Account:
The balance of payment, as we know, is built up in terms of credit and debit entries. On the side of credit account, the amount which a country has to receive from the other country is shown, while on the debt side of the account, the payment which has to be made to other countries is entered.
In the balance of payment on current account only those items are entered which do not create a new item or cancel a previously existing capital claim.
Main Credit items in the Balance on Current Account, are as follows:
(i) Value of merchandize exports.
(ii) Payments received from foreigners for rendering banking insurance and shipping services.
(iii) Travel expenditure of the foreign tourists in the country.
(iv) Expenditure of foreign students.
(v) Remittances of money by the nationals of the country living in other countries.
(vi) Income on investment (interest and dividend, etc.), from abroad.
(vii) Charity contributions made to the institutions by the foreigners.
(viii) Miscellaneous government transactions such as sale as of diplomatic representatives, repatriation, military and payments, etc., etc.
Main Debit items in the Balance of Payments on the Current Account, are as follows:
(i) Value on merchandise imports.
(ii) Payments made to the foreigners for rendering banking and insurance and shipping services for the country.
(iii) Travel expenditure of country’s tourists in other countries.
(iv) Payments made to country’s students studying abroad.
(v) Remittance by immigrants to their home countries.
(vi) Interest and dividend payments by the foreigners to their countries.
(vii) Donations sent to other countries.
(viii) Miscellaneous government transactions such as salaries of diplomatic representatives, repatriation; military aid payments, etc., etc. to other countries.
(2) Balance of International Payments on Capital Account:
The balance of international payments on capital account is split up into two parts:
(i) The balance of payment on long term capital account and (ii) the balance of payment on short term capital account.
In the balance of international payment on long term capital account, we include the net private and government long term loans and net long term foreign investment. The short term capital account is composed of:
(i) Private or government short term loans and (ii) net investment in short term debts.
The movement of capital from one country to another takes place due to three reasons:
Firstly, when country has to make investment abroad.
Secondly, when it has to advance loans to another country.
Thirdly, when the capital has to he shifted due to safety reasons.
The movement of capital from one country to another has a serious repercussion on the international payments on current account. When the capital is shifted to another country, a payment is to be made. Therefore, it is a debit entry and when we borrow from abroad, we receive payment, therefore it is credit entry. If we have a favorable balance on current account, it may be offset by a debit account balance on capital account.
(3) Gold Movements:
Gold is sometimes an important balancing item. If the deficit on international account exists, it is covered by shipping gold from one country to another. U.S.A., received large quantity of gold from other countries in the 1930’s.