The Nature of Debits and Credits

To the casual observer it might at first appear that the term "balance of trade" should refer to the difference between exports and imports, and that the "balance of payments," similarly, should refer to the difference between all "credit" and all "debit" transactions in a country's international accounts. Actually, however, the student of international finance has taken his cue from the accountant who, in speaking of the "balance sheet," means not simply the difference between or "balance" of assets and liabilities but the entire statement from which that difference may readily be computed.

Superficially the balance, with its opposing columns of "debits" and "credits," is reminiscent of double-entry accounting. Conceptually there is no kinship between a balance sheet and a balance of payments and only in the most restricted sense is there resemblance between an income statement and a balance of payments. These distinctions will become clear as the chapter proceeds. Let us begin with the meaning of the terms "debit" and "credit" in balance of payments terminology.

From the standpoint of a given country, say the United States, all international transactions which give rise to a money claim on some person, institution, or government abroad are credits (or, strictly speaking, credit transactions). Conversely, all international transactions which give rise to a money claim on someone (or some institution or the government) in the country by someone (or some institution or government) abroad, are debits. The most obvious credits are commodity or merchandise exports. Hence it is helpful to think of a country's international credits as having been created by the export of goods, services, securities, etc. Similarly, merchandise or commodity imports are the most easily imagined debits, and it is accurate to consider the international debits of a country as arising from the import of goods, services, securities, etc.