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Unit 11 : Balance of Payments and Balance of Trade : Meaning and Components

the sense that service receipts and payments are not recorded at the port of entry or exist as is the case Notes
with the merchandise imports and exports receipts. Except for this, there is no meaningful difference
between goods and services receipts and payments. Both constitute earnings or spendings of foreign
exchange (as opposed to borrowings and lendings of foreign exchange). Goods and Services Accounts
together constitute the largest and economically the most significant components in the BOP of any
country.

The Service Account records all the service exported and imported by a country in a year.
Unlike goods which are tangible or ‘visible,’ services are intangible.

The service transactions take various forms. They basically include (a) transportation, banking and
insurance receipts and payments from and to the foreign countries, (b) tourism, travel services and
tourist purchases of goods and services received from foreign visitors to home country and paid out
in foreign countries by home country citizens, (c) expenses of students studying abroad and receipts
from foreign students studying in the home country, (d) expenses of diplomatic and military personnel
stationed overseas as well as the receipts from similar personnel from overseas who are stationed in
the home country, and (e) interest, profits, dividends and royalties received from foreign countries
and paid out to foreign countries. These items are generally termed as investment income (or
expenditure) or receipts and payments arising out of what are called as “capital services”. For countries
like Malaysia and Singapore which have large foreign investments in their countries or for countries
like the USA, the UK, or France and Germany, which have huge investment operation overseas, the
investment income payments and receipts constitute a very substantial loss or gain in terms of foreign
exchange outflow and inflow. “Service Balance” is the sum of all invisible service receipts and payments,
in which the sum could be positive or negative or zero. A positive sum is regarded as favourable to a
country and a negative sum is considered as unfavourable. The terms are descriptive as well as
prescriptive. Favourable goods and service balance is, therefore, something to strive for and unfavourable
goods or service balance is something to avoid, both of which are in the national interest and welfare.
Unilateral Transfer Account
The third account in the BOP schedule is the Unilateral Transfers Account. This account includes all
gifts, grants and reparation receipts and payments to foreign countries. Unilateral transfer consist of
two types of transfers : (a) government transfers and (b) private transfers.
Foreign economic aid or assistance and foreign military aid or assistance received by the home
country’s government (or given by the home government to foreign governments) constitute
government to government transfers. The United States foreign aid to India, for example, is a
government transfer constituting a credit item in India’s BOP (but a debit item in the US BOP). These
are government to government donations or gifts. There is no well worked out theory to explain the
behaviour of this account because these flows depend on political and institutional factors. The
government donations (or aid or assistance) given to governments of other countries is a mixed bag
given for either economic or political or humanitarian reasons. Private transfers, on the other hand,
are funds received from or remitted to foreign countries on person-to-person basis. A Malaysian
settled in the United States remitting $100 a month to his aged parents in Malaysia, is a unilateral
(private) transfer inflow item in the Malaysian BOP. An American pensioner who is settled after
retirement in say, Italy, and who is receiving a monthly pension from America is also a private
unilateral transfer causing a debit flow in the American BOP but a credit flow in the Italian BOP.
Countries that attract retired people from other nations may, therefore, expect to receive an influx of
foreign receipts in the form of pension payments. And countries which render foreign economic
assistance on a massive scale can expect huge deficits in their unilateral transfer account. Unilateral
transfer receipts and payments are also called “unrequited transfers” because as the name itself
suggests, the flow is only in one direction with no automatic reverse flow in the other direction.

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