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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.