Page 131 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

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

bank account of the Malaysian exporter held in New York bank, the sum of $5 million would be held Notes
as debit in Malaysia’s short term capital account. The latter constitutes a short term capital outflow of
$5 million from Malaysia to the United States.
It is also interesting to note that it is often hard to keep track of all the short term capital movements
in and out of the country. They can at best be rough estimates. Indeed in some countries the separate
category of short term capital account does not exist. These transactions are simply included in an
account under the general term “Errors and Omissions including short-term capital account”. This is
what is done in the Malaysian system of BOP accounting. In some countries short term capital
transactions are included in the “Unrecorded Transactions” as a separate BOP account in its own
right. This Unrecorded Transactions Account or Errors and Omissions Account includes, besides
short term capital movements, the following items as well.
(a) Statistical and recording errors
(b) Smuggling
(c) Illegal and secret capital movements
(d) Imperfect estimation procedures.
All of them, like short term capital movements are estimates and are treated as errors and omissions
in the BOP accounting. Often it represents a difference in the sums of recorded credit and debit
transactions in the first four accounts of BOP (viz, goods account, services account, unilateral transfers
account and long-term capital account). The fifth account in BOP schedule may therefore be called
either as Short Term Capital Account or as Errors and Omissions including short term capital or
simply as Unrecorded Transactions Account.
International Liquidity Account

The sixth and final BOP account is the International Liquidity Account which simply records net changes
in foreign reserves. Essentially this account lists internationally acceptable means of settling
international obligations. International Liquidity Account is best understood as follows :
(A) In the following table total receipts on the first five accounts exceed the total payments on the
same five accounts by a sum of $150 million.
Table 1 : Surplus Case ($ Million)

Credit Debit
(Receipts) (Payments)
1. Goods Account 1,500 800
2. Services Account 500 1,400
3. Unilateral Transfers Accounts 100 120
4. Long Term Capital Account 900 400
5. Errors & Omissions
(including short term capital) Account 500 630
6. International Liquidity Account 150
7. Balance of Payments 3,500 3,500

The total receipts are $3,500 million and total payments are $3,350 million. There is a net BOP
surplus amounting to $150 million. This sum of $150 million is entered into International
Liquidity Account as debit. The logic of accounting for this sum of $150 million as debit or
payment is that, this sum represents either
(a) purchase or import of gold worth $150 million; or
(b) net addition to accumulation of foreign reserves of $150 million; or
(c) capital lending in the sum of $150 million to other countries on short term or long term basis.

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