International transactions among countries are recorded in much the same way as company transactions are recorded, using double-entry bookkeeping methods. Every transaction is recorded twice: once as a debit and once as a credit. However, there is no requirement that the sums of the two sides of a selected number of balance-of-payments accounts be the same, as there is with the private sector balance sheet. As a matter of fact, it is more common for these accounts to show deficits and surpluses than to be balanced.
The technical details of balance-of-payments accounts are explained in Appendix 6A. This section will briefly explain the nature of and the reasons for deficits and surpluses, as well as the techniques for adjusting a country's exchange rates.
In a balance-of-payments account one simply computes the private demand for and supply of a country's currency and subtracts the quantity supplied (QS) from the quantity demanded (QD). When QS is greater than QD, the country experiences a balance-of-payments deficit. Balance-of-payments deficits arise whenever the exchange rate is pegged at an artificially high levelthat is, when the currency is overvalued. When QS is less than QD, the country experiences a balance-of-payments surplus. The excess demand for a country's currency over its supply indicates that the currency is pegged at an artificially low level-that is, the currency is undervalued.
Overvalued currencies are offered at prices higher than customers are willing to pay. If there are no buyers, the currency's price-its exchange rate-will decline. To prevent the forced depreciation of a country's currency, the country's central bank usually steps in and acts as a buyer. The added demand for the currency stabilizes the exchange rate. The cost of stepping in is the amount the central bank spends to buy its own currency. Eventually, however, overvalued currencies do depreciate.
The pressure for the central bank to intervene in the foreign exchange market, which is characteristic of deficit-running countries, is not present in surplus-running countries. In such countries the central bank does not have to sell its currency to keep its value from rising even further.
Although there is tremendous international pressure to correct balance-ofpayments deficits, there is very little that can be done to force a country to eliminate a balance-of-payments surplus. Thus, although the IMF, the World Bank, and some developed countries are devising various plans to assist the deficit nations (mostly developing countries) in eliminating their problems, there is no plan that aims at enticing developed nations to eliminate their rather substantial surpluses.
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