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The Balance of PaymentsThe Balance of Payments
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It is the method countries use to monitor allinternational monetary transactions at a specific
period of time.
Usually, the BOP is calculated every quarter and
every calendar year. All trades conducted by both
the private and public sectors are accounted for inthe BOP in order to determine how much money is
going in and out of a country
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If a country has received money, this is known as a
credit,if a country has paid or given money, the transaction
is counted as a debit.
Theoretically, the BOP should be zero, meaning that
assets (credits) and liabilities (debits) should balance.
.
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So the BOP can tell the observer if acountry has a deficit or a surplus and from
which part of the economy the
discrepancies are stemming.
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Division
The BOP is divided into three main
categories:
current account
capital account
financial account
Within 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 mark the inflow and outflowof goods and services into a country. Like
Earnings on investments, oth u lic and rivate,
There are credits and de its on the trade of merchandise, whichincludes goods such as raw materials and manufactured goods that are
ought, sold or given away ( ossi ly in the form of aid).
Services refer to recei ts from tourism, trans ortation (like the levy thatmust e aid in Egy t when a shi asses through the Suez Canal),engineering, usiness service fees (from lawyers or
Royalties from atents and co yrights
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When combined, goods and services together make
up a country's balance of trade (BOT). The BOT is
typically the biggest bulk of a country's balance of
payments as it makes up total imports and exports.
If 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.
Balance of Trade
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The capital account is where allinternational capital transfers are
recorded.
This refers to the acquisition or disposal of
non-financial assets (for example, aphysical asset such as land) and non-
produced assets, which are needed for production but have not been produced,
like a mine used for the extraction of
diamonds.
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It includes
The transfer of goods
Financial assets by migrants leaving or
entering a country,
The transfer of ownership on fixed assets
(assets such as equipment used in the
production process to generate income)
The transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance
taxes, death levies, and, finally, uninsured
damage to fixed assets.
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international monetary flows related toinvestment in business, real estate, bondsand stocks are documented.
Also included are government-owned assets
such as foreign reserves, gold, specialdrawing rights (SDRs) held with theInternational Monetary Fund, private assetsheld abroad, and direct foreign investment.
Assets owned by foreigners, private andofficial, are also recorded in the financialaccount.
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The Other Accounts
Net rrors and Omissions ± Account is used to
account for statistical errors and/or untraceable
monies within a country Official Reserves ± total reserves held by official
monetary authorities within a country.
± These reserves are typically comprised of major
currencies that are used in international trade andfinancial transactions and reserve accounts (SDRs) held
at the IMF
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The Balance of Payments
A. Current Account
A. Net exports/imports of goods and services (Balance of Trade)
B. Net Income (investment income from direct portfolio
investment plus employee compensation
C. Net transfers (sums sent home by migrant and permanent
workers abroad)
B . Capital Account
Capital transfers related to purchase and sale of fixed assets such as real estate
C. Financial Account
A. Net foreign direct investment
B. Net portfolio investment
C. Other financial items
D. Net Errors and Omissions
Missing data such as illegal transfers
E. Reserves and Related Items
Changes in official monetary reserves including gold and foreign exchange reserves
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The Balancing Act
The current account should be balancedagainst the combined-capital and financial
accounts
fluctuating exchange rates, the change in thevalue of money can add to BOP discrepancies.
When 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.
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If a country has a fixed asset abroad, this borrowedamount is marked as a capital account outflow.
However, the sale of that fixed asset would be
considered a current account inflow (earnings from
investments). The current account deficit would thus be funded.
When a country has a current account deficit that is
financed by the capital account, the country is
actually foregoing capital assets for more goods andservices. If a country is borrowing money to fund its
current account deficit, this would appear as an
inflow of foreign capital in the BOP.