Unilateral transfers is one part of the current account of the balance of payments. It tracks the "one-way" transfer of funds from one country to another that are made without any counter flow or exchange or goods and services. These payments are merely gifts from one country to another. The gift might come from a person, business, or (frequently) government. Foreign aid payments from one government to another are an important part of unilateral transfers.
Like the international trading of goods and services that can be either exported or imported, unilateral transfers also flow in both directions. A given nation might give funds to one nation, and receive funds from another. Funds that flow to a nation are positive values in the unilateral transfer category (and balance of payments), and funds that flow from a nation are negative values.
Unilateral transfers are the one part of the current account that are not included in the calculation of the balance of trade. The balance of trade includes both the balance on services and the balance on merchandise trade and is officially termed the balance on goods and services in the balance of payments account. In addition to the current account, the balance of payments also includes the capital account, which tracks the flow of investment payments in to and out of a country.
Balance of Payments for Northwest Queoldiola
To illustrate the balance on services, consider the Republic of Northwest Queoldiola, a hypothetical country that is well suited for this task. Other real world countries, such as the United States, Brazil, or Lichenstein, have similar accounts (albeit with different numbers).
The chart to the right presents the hypothetical balance of payments for Northwest Queoldiola stated in terms of queolds, the hypothetical Queoldiolan currency. The balance of payments for real world countries is generally stated in terms of their domestic currencies (such as dollars for the United States or reals for Brazil).
First note that this chart contains two major sections, Current Account and Capital Account. Near the bottom of the chart is a summary Balance of the Current and Capital Accounts, which combines the two sections. At the very bottom is the overall Balance of Payments.
Highlighting the Balance on ServicesThe first task is to highlight the current account portion of the Northwest Queoldiola balance of payments chart. This can be done by clicking the [Current Account] button. The current account is a record of all trade between one nation and other nations. It includes payments for imports and exports of both goods and services. It also includes monetary gifts or transfer payments to and from other nations. This account is divided into three categories -- balance on merchandise trade, balance on services, and unilateral transfers.
Key to this present discussion are the transfer of funds in to and out of the country. The subset of the current account that tracks these flows can be highlighted with a click of the [Un Tran] button. Note that this click highlights a single line in the balance of payments chart -- unilateral transfers.
While a single line is highlighted a more detailed balance of payments accounting would show a positive value for transfers flowing into the country and a negative value for transfers flowing out. The sum, or net, of these two values generates a positive value of 5.3 million queolds for the hypothetical Queoldiolan economy. This means Northwest Queoldiola receiving more gifts and transfers from other countries that it is giving.
Foreign Aid and Birthday PresentsUnilateral transfers are gifts or transfers among countries. They are "unilateral" because nothing is expected (that is, goods and services) in exchange for the payments
A portion of these unilateral transfers are certainly gifts from one person to another. Perhaps your grandmother, who still lives in the "old" country sends you $25 as a birthday present. Alternatively, a newly immigrated resident of the country sends a portion of his paycheck to help feed family members remaining back home.
However, a significant share of unilateral transfers is government aid given from one country to another. Commonly termed foreign aid, these transfers generally go from more developed or industrialized countries to lesser developed countries. Ideally the aid is a nothing more than a gift, with no strings attached, which can be used by the receiving country to advance development. However, in practice, the giving countries are prone to use the funds to achieve assorted political goals.
The Rest of the Current AccountThe two remaining parts of the current account track the flow of payments for tangible goods and intangible services.
- Balance on Merchandise Trade: This is the difference between the payments received for exports of merchandise trade to other nations and the payments made for the imports of merchandise trade from other nations. This includes only tangible goods. Once again a summary balance is provided for merchandise trade, which for Northwest Queoldiola is positive, meaning that it exports more goods than it imports.
- Balance on Services: This is the difference between the payments received for exports of services to other nations and the payments made for the imports of services from other nations. This includes only intangible services. Once again a summary balance is provided for the trade in services, which for Northwest Queoldiola is negative, meaning that it exports fewer services than it imports.
UNILATERAL TRANSFERS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2015. [Accessed: March 2, 2015].