Balance of payments (BOP) is a system used by countries to record all international economic transactions completed within one year. Its purpose is to show how much money the country is receiving and how much it is giving away. Ideally, exports and imports should be balanced but it is not always the case. The BOP consists of three main components: the current account, the capital account, and the financial account. (Heakal, 2009)
The Current Account
The current account can be defined as a difference between exports and imports of services, goods and currency transfers. Both public and private transactions are included into the current account calculations. The current account can be divided into such categories: Trade, Net Income, Direct Transfers, Asset Income. All goods and services combined form a Balance of Trade (BOT). Two opposite states of the BOT can be distinguished: the deficit and the surplus. The deficit of the BOT occurs when a country imports more then it exports. Correspondingly, the surplus occurs when a country exports more then it imports. (Amadeo)
The Capital Account
The capital account includes all the international capital transfers. The major categories of the capital account are: Debt Flows, Foreign Direct Investment Flows, and Portfolio Investment Flows. For example, the transfer of non-financial assets such as land, non-produced assets, which are needed for production (Heakal, 2009).
The Financial Account
The financial account records international monetary flows related to business investment, real estate investment, and investment in bonds and stocks.
All of the BOP components should balance each other so that the final BOP could be 0.
Bibliography
Amadeo, K. (n.d.). What Is the Current Account? Retrieved from http://useconomy.about.com/od/tradepolicy/p/CBO_Current_acc.htm
Heakal, R. (2009, November 28). What Is The Balance Of Payments. Retrieved from Investopedia: http://www.investopedia.com/articles/03/060403.asp#axzz2578PUJeC
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