balance of payments.doc

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Balance of payments (BOP) accounts are an accounting record

of all monetary transactions between a country and the rest of the

world. [1]These transactions include payments for the country's

exports and imports of goods , services , financial capital ,

and financial transfers . The Bo accounts summari!e international

transactions for a specific period, usually a year, and are prepared

in a single currency, typically the domestic currency for the country

concerned. "ources of funds for a nation, such as exports or the

receipts of loans and investments, are recorded as positive or

surplus items. #ses of funds, such as for imports or to invest inforeign countries, are recorded as negative or deficit items.

The two principal parts of the B$ accounts are the current

account and the capital account .

The current account shows the net amount a country is earning if itis in surplus, or spending if it is in deficit. %t is the sum of

the balance of trade &net earnings on exports minus payments for

imports , factor income &earnings on foreign investments minus

payments made to foreign investors and cash transfers. %t is

called the current account as it covers transactions in the (here

and now( ) those that don't give rise to future claims.[*]

The capital account records the net change in ownership of foreign

assets. %t includes the reserve account &the foreign exchange

mar+et operations of a nation's central ban+ , along with loans and

investments between the country and the rest of world &but not the

future regular repayments dividends that the loans and
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investments yield- those are earnings and will be recorded in the

current account . The term (capital account( is also used in the

narrower sense that excludes central ban+ foreign exchange

mar+et operations "ometimes the reserve account is classified as

(below the line( and so not reported as part of the capital account

The balance of payments &B$ is the method countries use to

monitor all international monetary transactions at a specific period

of time. #sually, the B$ is calculated every /uarter and every

calendar year. 0ll trades conducted by both the private and public

sectors are accounted for in the B$ in order to determine how

much money is going in and out of a country. %f a country hasreceived money, this is +nown as a credit, and, if a country has

paid or given money, the transaction is counted as a debit.

Theoretically, the B$ should be !ero, meaning that assets

&credits and liabilities &debits should balance. But in practice this

is rarely the case and, thus, the B$ can tell the observer if a

country has a deficit or a surplus and from which part of the

economy the discrepancies are stemming.

The Balance of Payments Divided

The B$ is divided into three main categories the current

account , the capital account and the financial account. ithin

these three categories are sub)divisions, each of which accounts

for a different type of international monetary transaction.
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The Current Account

The current account is used to mar+ the inflow and outflow of

goods and services into a country. 2arnings on investments, both

public and private, are also put into the current account.

ithin the current account are credits and debits on the trade of

merchandise, which includes goods such as raw materials and

manufactured goods that are bought, sold or given away &possibly

in the form of aid . "ervices refer to receipts from tourism,transportation &li+e the levy that must be paid in 2gypt when a ship

passes through the "ue! 3anal , engineering, business service

fees &from lawyers or management consulting, for example , and

royalties from patents and copyrights. hen combined, goods and

services together ma+e up a country's balance of trade &B$T . The

B$T is typically the biggest bul+ of a country's balance ofpayments as it ma+es up total imports and exports. %f a country

has a balance of trade deficit, it imports more than it exports, and if

it has a balance of trade surplus, it exports more than it imports.

4eceipts from income)generating assets such as stoc+s &in the

form of dividends are also recorded in the current account. Thelast component of the current account is unilateral transfers. These

are credits that are mostly wor+er's remittances, which are salaries

sent bac+ into the home country of a national wor+ing abroad, as

well as foreign aid that is directly received.

The Capital Account

The capital account is where all international capital transfers are


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recorded. This refers to the ac/uisition or disposal of non)financial

assets &for example, a physical asset such as land and non)

produced assets, which are needed for production but have not

been produced, li+e a mine used for the extraction of diamonds.

The capital account is bro+en down into the monetary flows

branching from debt forgiveness, the transfer of goods, and

financial assets by migrants leaving or entering a country, the

transfer of o nership on fi!ed assets &assets such as

e"uipment used in the production process to generateincome , the transfer of funds received to the sale or

ac"uisition of fi!ed assets, gift and inheritance ta!es, death

levies, and, finally, uninsured damage to fi!ed assets#

The $inancial Account

%n the financial account, international monetary flows related toinvestment in business, real estate, bonds and stoc%s are

documented#

0lso included are government)owned assets such as foreign

reserves, gold, special dra ing rights (&D's) held ith the

nternational onetary $und, private assets held abroad, anddirect foreign investment# Assets o ned by foreigners,

private and official, are also recorded in the financial

account#

The Balancing Act

The current account should be balanced against the combined)

capital and financial accounts. 5owever, as mentioned above, this
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rarely happens. e should also note that, with fluctuating

exchange rates, the change in the value of money can add to B$

discrepancies. hen there is a deficit in the current account, which

is a balance of trade deficit, the difference can be borrowed or

funded by the capital account. %f a country has a fixed

asset abroad, this borrowed amount is mar+ed as a capital

account outflow. 5owever, the sale of that fixed asset would be

considered a current account inflow &earnings from investments .

The current account deficit would thus be funded.

hen a country has a current account deficit that is financed by

the capital account, the country is actually foregoing capital assets

for more goods and services. %f a country is borrowing money to

fund its current account deficit, this would appear as an inflow of

foreign capital in the B$ .

*iberali+ing the Accounts

The rise of global financial transactions and trade in the late)*6th

century spurred B$ and macroeconomic liberali!ation in many

developing nations. ith the advent of the emerging mar+et

economic boom ) in which capital flows into these mar+ets tripled

from #"7 86 million to #"7 186 million from the late 19:6s untilthe 0sian crisis ) developing countries were urged to lift restrictions

on capital and financial)account transactions in order to ta+e

advantage of these capital inflows. ;any of these countries had

restrictive macroeconomic policies, by which regulations prevented

foreign ownership of financial and non)financial assets. The

regulations also limited the transfer of funds abroad. But with

capital and financial account liberali!ation, capital mar+ets began
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to grow, not only allowing a more transparent and sophisticated

mar+et for investors, but also giving rise to foreign direct

investment.

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