Abstract
When people or individual households plan out their budget, they usually take into account the expected budget that the household will receive. Then that person or household will plan out the budget as per the needs and expenses that the entity will incur in a period. If the amount of expenses outstrips the income, the possibility of a deficit might occur. So it is with nations. They must strive to balance their expenses with their income, or they will run into instances of deficit spending, when they cannot disburse funds for their needs and cannot balance their payments for a certain time period.
Balance of Payments: A Short Definition
The term “balance of payments” can be defined as the system nations use to track all payments that are transacted by that country with other nations in a given time frame (Investopedia, 2008). It records all the outflows and inflows of manufactured items, financial dealings and services between one country and the other nations in the world (Economic Data and Social Services International, 2008). The balance of payments, consisting of all monetary transactions of one nation and its trade partners, is inclusive of the balance of trade, loans generated form private sources and their corresponding interest, grants given by other countries or other international institutions and the market movement of precious metals such as gold, or the country’s capital account (The Columbia Encyclopedia, 2008). The figures calculated for the BOP are tallied quarterly and at the end of the calendar fiscal year (Investopedia, 2008).
Recording the BOP
These transactions are recorded using double-entry practices and principles; the amount to be recorded is listed on both sides of the Balance of Payments account (Norman Fieleke, 1996). In this practice, the amount is entered as debit and credit items, with the two figures coming out as zero (Economic Data, 2008). It is important to calculate the figures for the BOP as this will give economic managers a gauge on the inflows and outflows of money in the economy. If the country incurs more debts than credits, then the country’s currency will tend to be unstable (Columbia, 2008). It is the same in the area of business; entries for debits should match all items listed in the credit section (Fieleke, 1996).
Importance of the Balance of Payments
As earlier stated, the country’s balance of payments must total zero, meaning that the country is spending what it earns with no incurred debts (Juan Luis Moreno-Villalaz, Marco Fernández & Peter Allen). Again in using the terms of corporate finance, the total assets of the company must be able to offset the total debts that the company has incurred (Fieleke, 1996). It is important therefore that a country must be able to balance what it spends and what it earns (Manfred Davidmann, 2006). If a country is in the habit of overshooting its credit, that is money that the country earns (Investopedia, 2008), then the country has to make adjustments to generate more income or reduce the spending outflows of the country (Davidmann, 2006).
In the case of the United States, the country has registered negative figures in its balance of payments since the middle of the 1900’s (Columbia, 2008). This is due to the country’s foreign policy initiatives such as significant amounts of foreign aid, large investments on the European continent, and various military excursions abroad (Columbia, 2008). In an effort to counteract this issue, the United States, beginning in the 70’s, began devaluing the dollar to create an improved balance of payments scenario (Columbia, 2008). The oil price incident in the same decade negatively impacted the balance of payments of not only the United States, but some Western European countries (Columbia, 2008). This current expansion of the external debts of the dollar may lead to a possible loss of strength for the United States currency (Philip Lane & Gina Maria Milessi-Ferretti, 2002).
Saudi Arabia, on the other hand, is first and foremost and oil economy (Dr. Abdulrahman Al-Hamidy, 2002). As a producer of oil, the Kingdom keeps itself abreast with the other top oil producers, the United States and Russia (Al-Hamidy, 2002). In the 2004 state census, the government posted a surplus of about SR 193.2 billion, or $ 51.59 billion (Saudi Embassy). Through the 1980’s and into the early part of the 1990’s, Saudi Arabia registered surplus numbers in its balance of payment figures (Saudia Online, 2000).
The balance of payments of the oil-rich nation took a reversal when the country experienced a decline in its oil exports due to a glut in the world oil market (Saudia, 2000). In the years of the United States-led Allied “Desert Storm” military offensive, the Kingdom chalked up surplus numbers due to the increased value of their primary export (Saudia, 2000).
But whatever is said, the importance of having a balanced expense and credit structure cannot be overemphasized.
One way for the United States, or any country for that matter, to pay for more than what it earns is for them to contract loans (Davidmann, 2006). But in the long run, those that contracted these loans will make their people work harder and produce more to cover the interest payments on those loans (Davidmann, 2006). Thus it is important for the country to find ways to reduce the spending portion of the budgetary process (Davidmann, 2006). If people, or countries, still continue to overspend, then they will be faced with having less money and a decreased living standard (Davidmann, 2006).
References
- Al-Hamidy, A., Dr. (2002). Use of balance of payments statistics: case of Saudi Arabia. Retrieved November 5, 2008, from http://www.imf.org/external/pubs/ft/bop/2002/02-50.pdf.
- Columbia Encyclopedia,The, 6th Edition. (2008). balance of payments. Retrieved November 5, 2008, from http://www.encyclopedia.com/doc/1E1-balancPay.html
- Davidmann, M. (2006). Inflation, balance of payments and currency exchange rates. Retrieved November 5, 2008, from http://www.solhaam.org/articles/inflation.html
- Economic Data and Social Services International. (2008). IMF balance of payment statistics. Retrieved November 5, 2008, from http://www.esds.ac.uk/international/support/user_guides/imf/bops.asp
- Fieleke, N.S. (1996). What is the balance of payments? Retrieved November 5, 2008, from http://www.bos.frb.org/economic/special/balofpay.pdf.
- Investopedia. (2008). What is the balance of payments? Retrieved November 5, 2008, from http://www.investopedia.com/articles/03/060403.asp
- Lane, P.R., Milesi-Ferretti, G.M. (2001). External wealth, the trade balance, and the real exchange rate. Retrieved November 5, 2008, from http://www.tcd.ie/Economics/research/tep/2001/TEPNo21PL21.pdf.
- Moreno-Villalaz, J.L., Fernández, M. & Allen, P. (n.d.). How to read the balance of payments of Panama. Retrieved November 5, 2008, from http://www.mef.gob.pa/Doc.%20Interes/Listado%20de%20Estudios%20y %20Consultor%C3%ADas(1)-%20Octubre%202006/(9)JLMoreno-HOW%20TO %20READ%20THE%20BALANCE%20OF%20PAYMENTS%20OF%20PANAMA %20FFF.doc.
- Saudi Embassy. (n.d.). Saudi Arabia: Facts and figures. Retrieved November 5, 2008, from http://www.saudiembassy.net/Conferences-Press-Kit-Visits/CP-Visit-April-2005/KSA %20Facts%20and%20Figures%202005.pdf.
- Saudia Online. (2000). Balance of trade in Saudi Arabia. Retrieved November 5, 2008, from http://www.saudia-online.com/balance_of_trade.htm
