What Is the Balance of Payments (BOP)?

The balance of payments (BOP) is the method countries use to monitor all internatio൲nal monetary transactions in a specific period. The BOP is usually calculated every quarter and every calenda﷽r year.

All trades conducted by both the private and public sectors are accounted for in the BOP to determine how much money is going in and out of a country. If a country has received money, this is known as a credit, and 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, but in practice, this is rarely the case. Thus, the BOP can tell the observer if a country has a deficit or a surplus and fꩲrom which part of the economy the discrepancies are stemming.

How the Balance of Payments (BOP) Is Divided

澳洲幸运5官方开奖结果体彩网:The BOP is divided into three main categories:

• Current account
• Capital account
• Financial account

Within these three categories are subdivisions that account for a different type of international monetary transaction. As an example, the current account includes a goods and services account, a primary income account, and a secondary income account.

The Current Account

The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account.

Within the current account are credits and debits on the trade of merchandise, which includes goods such as 澳洲幸运5官方开奖结果体彩网:raw materials and manufactured goods that are bought, sold, or given away, possibly in the form of aid. Services refer to receipts from tourism, transportation, engineering, business service fees, and 澳洲幸运5官方开奖结果体彩网:royalties from patents and 澳洲幸运5官方开奖结果体彩网:copyrights.

Goods and services together make up a country's 澳洲幸运5官方开奖结果体彩网:balance of trade (BOT). The BOT is typically the biggest bulk of a country’s balance of payments, as it makes up total 澳洲幸运5官方开奖结果体彩网:imports and exports. If a country has a BOT deficit, it imports more than it exports, and if it has a BOT surplus, it exports more than it imports.

Receipts from income-generating assets such as stocks—in the form of 澳洲幸运5官方开奖结果体彩网:dividends—are also recorded in the current account. The last component of the current account is unilateral transfers.𝓡 These are credits that are mostly workers’ remittances, whi൲ch are salaries sent back into the home country of a national working abroad, as well as foreign aid that is directly received.

The Capital Account

The capital account is where all international capital transfers are recorded. This refers to the 澳洲幸运5官方开奖结果体彩网:acquisition or disposal of nonfinancial assets—for example, a physical asset such as land—and non-produced assets, which are needed for production but have not been produced, such as a mine used for the extraction of diamonds.

The capital account is broken 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 ownership on fixed assets, the transfer of funds received to the sale or acquisition of 澳洲幸运5官方开奖结果体彩网:fixed assets, gift and 澳洲幸运5官方开奖结果体彩网:inheritance taxes, death levies, and, finally, uninsured damage to fix𒆙ed assets.

The Financial Account

In the financial account, international monetary flows related to investment in business, real estate, bonds, and stocks are documented. Also included are government-owned assets, such as foreign reserves, gold, 澳洲幸运5官方开奖结果体彩网:special drawing rights (SDRs) held with the 澳洲幸运5官方开奖结果体彩网:International Monetary Fund (IMF), private assets held abroad, and direct 澳洲幸运5官方开奖结果体彩网:foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account.

How the BOP Is Balanced

The current account should be balanced against the combined capital and financial accounts; however, as mentioned above, this rarely happens. We should also note that with fluctuating 澳洲幸运5官方开奖结果体彩网:exchange rates, the change in the value of money can add to BOP discre꧙pancies.

If a country has a fixed asset abroad, this borrowed amount 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 澳洲幸运5官方开奖结果体彩网: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 and services. If a country is borrowing money to fund its current account deficit, this would appear as an inflow of foreign capital in 🍸the BOP.

Liberalizing the BOP

The rise of global financial transactions and trade in the late 20th century spurred BOP and macroeconomic 澳洲幸运5官方开奖结果体彩网:liberalization in many developing nations. With the advent of the 澳洲幸运5官方开奖结果体彩网:emerging market economic boom, developing countries were urged to lift restrictions on capital- and financial-account transactions to take advantage of these capital inflows.

Many of these countries had restrictive macroeconomic policies, by which regulations prevented foreign ownership of financial and nonfinancial assets. The regulations also limited 🦩the transfer of funds abroad.

With capital and financial account liberalization, capital markets began to grow, not only allowing a more transparent and sophisticated market for investors but also giving rise to 澳洲幸运5官方开奖结果体彩网:foreign direct investment (FDI).

For example, investments in the form of a new power station would bring a country greater exposure to new technologies and efficiency, eventually increasing the nation’s overall 澳洲幸运5官方开奖结果体彩网:gross domestic product (GDP) by allowing for greater volumes of productio💝n. Liberalization can also facilitate less risk by allowing greater diversification in various markets.

Explain Like I'm Five

The balance of payments measures how money flows across a country's borders over a specific period of time. It records the value of a country's exports and imports, as well as the flows of investments and loans, and remittances by workers. Economists use the balance of payments to assess how a country is interacting with the world market.

The Bottom Line

The balance of payments (BOP) is the method by which countries measure all of the 澳♚洲幸运5官方开奖结果体彩网:international monetary transactions within a certain period. The BOP consists of thre🃏e main accounts: the current account, the capital account, and the financial account. The current account is meant to balance against the sum of the financial and capital account but rarely does.

Globalization in the 🦂late 20th century led to BOP liberalization in many emerging market economies. These countries lifted restrictions on BOP accounts to take advantage of the cash flows arriving from developed foreign nations, which in turn boosted their economies.