INTERNATIONAL PAYMENT

a payment made between countries either in settlement of a trade debt, as a unilateral transfer of funds, for capital investment, or for some other purpose. The causes of such payments, the methods of making them, and accounting for them are matters of concern to economists and national governments. International debts are settled either from accumulated balances of foreign exchange, or by loans from the creditor to the debtor, or by drawings on the International Monetary Fund (q.v.), or by movements of gold. Whenever this process is multilateral rather than bilateral, it provides an additional advantage. For if, in terms of the total annual turnover of transactions between them, England is in debit to the United States and in surplus with the Commonwealth and the latter in surplus with the United States but in debit to England, there is no net change in the foreign-exchange position of the countries concerned if the various credits and debits exactly cancel out. In practice, however, it does not work out so smoothly; there always have been considerable fluctuations in net credit and debit positions within any given year as well as between years. The way in which a country balances its international accounts is one of the most important problems of its balance of payments. The balance of payments is a systematic record of all economic transactions during a given period between residents (including the government) of one country and residents (including the governments) of other countries, referred to for convenience as foreigners. The transactions are presented in the form of double entry bookkeeping with credit entries balanced on the debit side, and vice versa. The balance of payments of a country thus necessarily balances. There can be no surplus or deficit in a country's balance of payments as a whole. The balance of payments of the United States, for example, records the various ways in which dollars are made available to foreigners through U.S. imports, American tourists' expenditures abroad, donations, foreign lending activities, and so forth. These expenditures are shown on the debit (payments) side of the balance. The credit (receipts) side indicates the various uses to which foreigners put their dollars, such as paying for U.S. exports, servicing of debts to the United States, and the like. If foreign countries do not spend all the dollars made available to them during a given period to obtain goods and services from the United States, the balance of payments will show on the credit (receipts) side an increase of foreign-held dollar balances, foreign purchases of U.S. securities, gold exports from the United States, or some similar item. If, on the other hand, the dollars made available by the United States are insufficient to pay for the exports of U.S. goods and services, additional dollars can be obtained only by liquidation of foreign holdings in the United States, by gold imports into the United States, and by similar operations which would necessarily be recorded on the payments side. This must mean that for any period the receipts measured in dollars are equal to the payments measured in dollars when all the receipts and payments are included. Countries are greatly concerned about the types of transactions giving rise to the receipts and payments of foreign exchange and how these compare in size with one another. The standard schedule for reporting a country's balance of payments to the International Monetary Fund (IMF) is divided into two major sections: the current account and the capital and monetary gold account. The current account is in turn subdivided into two sections; one records goods and services, the other, transfer payments. The capital account is also subdivided into two major sections; one records the transactions in nonmonetary sectors, the other, in monetary sectors. Commonly heard references to a surplus or deficit in the balance of payments would appear to be contradictions. Often what is actually meant is the trade balance (i.e., the net credit or debit of merchandise trade). While this is an important segment of the balance of payments, it may have very little significance by itself. An import surplus may be matched by net sales of services that are closely similar in their economic implications to sales goods. There would then be no deficit in goods and services as a whole, and this balance is a broader and more significant measure than is trade alone. Often the balance of goods and services is discussed as if it were the balance on current account. The current account as a whole has always had a basic importance since it is the counterpart of the capital account. A nation with a deficit on total current account is ipso facto decreasing its capital assets abroad (including gold) or increasing its capital liabilities to foreigners. A nation with a current-account surplus is gaining foreign assets or reducing its foreign liabilities. A deficit in the balance of goods and services is not necessarily an indication of pressure on a country's exchange rate. It may be matched by an inflow of investment capital that strengthens the immediate exchange position and builds up a country's future exporting capacity. Similarly, a surplus in the balance of goods and services may be no indication of a strong exchange position. In public discussions a deficit in the balance of trade is often referred to as an unfavourable trade balance and a surplus as a favourable trade balance. These terms, when not wholly invalid, are subject to such grave limitations that they are rejected in modern treatments of the subject and are replaced by such terms as active and passive, or positive and negative, trade balance. Other terms used for the same phenomena are export surplus and import surplus, or credit balance and debit balance. The more important item, net total on current account, is often designated by the terms surplus or deficit in a country's balance of current payments. The value of the net outflow of gold plus net increases in foreign holdings of a country's short-term balances has most frequently been used as a measure of a country's balance-of-payments deficit. It is one measure of what are termed accommodating payments, i.e., those that have taken place only because the other items in the balance of payments leave a gap of this size to be filled. This is a useful theoretical concept even though in practice it is by no means easy to distinguish between accommodating and other payments.