Balsnce Of Payments

Balance of Payments

It is defined as systematic record of all economic transactions between a county and the rest of the world.

Thus balance of payments includes all visible and non-visible transactions of a country during a given period, usually a year. It represents a summation of country's current demand and supply of the claims on foreign currencies and of foreign claims on its currency.

These transactions include:

• Payments for the country's exports and imports of goods, services

• Financial capital

• Financial transfers.

When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments.

Balance of payments often refers to this sum:

• A country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive)

• By a specific amount if sources of funds (such as export goods sold and bonds sold)

• Exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that amount.

• There is said to be a balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter.

Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's currency and other currencies.

Current Account

Refers to the monetary value of international flows associated with transactions in goods, services, income flows and unilateral transfers.

Merchandise Trade Balance

1. The dollar Value of merchandise exports is recorded as a plus (credit), and the dollar value of merchandise imports is recorded as a minus (debt).

2. Merchandise Trade includes all the goods of the United States imports and exports.

Goods and Services balance

The better understanding of the international transactions of a country, we must add services to the merchandise trade account.

• Unilateral Transfers

These items include transfers of goods and services or financial assets between the USA and the rest of the world.

• Private Transfer Payments: Gifts made by individuals and nongovernmental institutions to foreigners.

• Governmental Transfers: Gifts or grants made by one government to foreign residents or foreign governments.

Current Account

The balance of payments is a record of all monetary transactions between a country and the rest of the world on a specific period of time usually a year.

Current account is a section within the balance of payments which includes trade in goods, services and rent that occur between residents of a country and the rest of the world in a given period.

Capital Account

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