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Introduction to Balance of Payments

The Balance of Payments (BOP) is a systematic record of all economic transactions of a country with the rest of the world during a specific period, usually a year.

  • It includes the value of imports and exports of goods and services, financial transfers, investment flows, and other international transactions.
  • The BOP helps to understand a country’s financial position and its interactions with other economies.

1.) Balanced Balance of Payments:

  • A balanced balance of payments occurs when a total receipts of a country are equal to its total payment. This means there is no surplus or deficit.

2.) Favorable (Surplus) Balance of Payments:

  • A favorable balance of payments occurs when a total receipts of a country exceeds its total payment.
  • This means that the country is earning more from exports, investments, and other financial transactions than it is spending.

3.) Unfavorable (Deficit) Balance of Payments:

  • An unfavorable balance of payments occurs when a total payment of a country exceeds its total receipts.

The Balance of Payments (BOP) is divided into several accounts, each tracking different types of economic transactions between a country and the rest of the world.

The major components of the BOP are:

1.) Current Account:

  • The Current Account of the Balance of Payments records the inflows and outflows of goods, services, income, and current transfers.
  • It tracks the economic transactions that are related to the country’s trade, income from abroad, and transfers between residents and non-residents.

2.) Capital Account:

  • Capital Account is related to the transaction of capital. It is the record of the exchange of financial assets.
  • It indicates the inflow and outflow of capital of a country with other countries.
  • Borrowing and lending of capital, repayment of capital purchase and sale of foreign securities are examples of Capital Account

Note: If the inflow of capital is more than the outflow, the balance is surplus and if the outflow is more than the inflow, the balance is deficit.

3.) Financial Account (Cash Account):

  • The Financial Account (sometimes referred to as the Cash Account) records the transactions that involve financial assets and liabilities between a country and the rest of the world. This account tracks foreign investments, loans, and other capital flows.

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