What is balance of payment?

The balance of payments (BoP) is a statement of all economic transactions between a country and the rest of the world during a specific period of time, usually a year. It records all payments made to and received from other countries for goods, services, income, current transfers, and capital transfers.

What are the components of balance of payment?

The BoP is divided into two main accounts: the current account and the capital account. The current account records all payments for goods, services, income, and current transfers. The capital account records all payments for capital goods, financial assets, and liabilities.

What is the difference between current account and capital account?

The current account records all payments for goods, services, income, and current transfers. The capital account records all payments for capital goods, financial assets, and liabilities. The current account is always in balance, while the capital account can be in surplus or deficit.

What is a surplus in balance of payment?

A surplus in the balance of payments occurs when a country receives more money from other countries than it pays out. This can happen when a country exports more goods and services than it imports, or when it receives more income from foreign investments than it pays out in interest and dividends.

What is a deficit in balance of payment?

A deficit in the balance of payments occurs when a country pays out more money to other countries than it receives. This can happen when a country imports more goods and services than it exports, or when it pays out more interest and dividends on foreign investments than it receives in income.

What are the causes of balance of payment deficit?

There are many factors that can cause a balance of payment deficit, including: *

What are the effects of balance of payment deficit?

A balance of payment deficit can have a number of negative effects on a country's economy, including: *

What are the solutions to balance of payment deficit?

There are a number of things that a country can do to address a balance of payment deficit, including: *

What is the role of central bank in balance of payment?

The central bank plays a key role in managing a country's balance of payments. The central bank can use a variety of tools to influence the balance of payments, including: *

Balance of Payment

Table of Contents

Balance of Payment

The following are the subtopics of Balance of Payment:

Current Account
Capital Account
Financial Account
Net Errors and Omissions
Reserve Account

The current account records the flow of goods, services, income, and current transfers between a country and the rest of the world. The capital account records the flow of capital between a country and the rest of the world. The financial account records the flow of financial assets between a country and the rest of the world. Net errors and omissions are adjustments made to the current account, capital account, and financial account to account for any discrepancies in the data. The reserve account records the changes in a country’s official reserves.
The balance of payments (BoP) is a statement of all economic transactions between a country and the rest of the world during a specific period of time, usually a year. It is a record of all payments received from and made to foreign countries. The BoP is divided into three main accounts: the current account, the capital account, and the financial account.

The current account records the flow of goods, services, income, and current transfers between a country and the rest of the world. Goods are tangible items that are bought and sold, such as cars, computers, and oil. Services are intangible items that are bought and sold, such as tourism, banking, and insurance. Income is MoneyMoney that is earned from investments, such as dividends and interest. Current transfers are payments that are not made in exchange for goods or services, such as foreign aid and RemittancesRemittances.

The capital account records the flow of capital between a country and the rest of the world. Capital is Money that is invested in businesses or other assets. The capital account includes both long-term and short-term capital flows. Long-term capital flows are investments that are made for more than one year, such as the purchase of a factory or a building. Short-term capital flows are investments that are made for less than one year, such as the purchase of stocks or BondsBonds.

The financial account records the flow of financial assets between a country and the rest of the world. Financial assets are things of value that can be bought and sold, such as stocks, Bonds, and bank deposits. The financial account includes both direct InvestmentInvestment and portfolio Investment. Direct investment is when a company invests in another company by buying a controlling interest in it. Portfolio investment is when a company or individual buys SharesShares in another company.

Net errors and omissions are adjustments made to the current account, capital account, and financial account to account for any discrepancies in the data. These adjustments are usually small and are made to ensure that the BoP balances.

The reserve account records the changes in a country’s official reserves. Official reserves are assets that a country holds to back up its currency. They include gold, foreign currencies, and special drawing rights (SDRs). SDRs are a type of international reserve asset that is created by the International Monetary Fund (IMF).

The BoP is an important tool for understanding a country’s economic health. It can be used to track a country’s trade balance, investment flows, and official reserves. The BoP can also be used to identify potential economic problems, such as a Trade Deficit or a loss of official reserves.

The BoP is a complex and ever-changing document. It is important to remember that the BoP is just one tool for understanding a country’s economic health. It should not be used in isolation, but should be considered along with other economic data, such as gross domestic product (GDP), InflationInflation, and unemployment.

frequently asked questions

Current Account

What is the current account?
The current account is a record of all the economic transactions between a country and the rest of the world that take place over a specific period of time, usually a year. It includes the value of goods and services that are exported and imported, as well as income earned from investments abroad and payments made to foreign investors.
What are the components of the current account?
The current account is divided into three main components: goods, services, and income. The goods component includes the value of all goods that are exported and imported. The services component includes the value of all services that are exported and imported, such as tourism and banking. The income component includes the income that is earned by residents of a country from investments abroad, such as dividends and interest payments, as well as the payments that are made to foreign investors who hold assets in a country.
What is the Balance of Trade?
The balance of trade is the difference between the value of goods that are exported and the value of goods that are imported. A country has a trade surplus if it exports more goods than it imports, and a trade deficit if it imports more goods than it exports.
What is the balance of payments?
The balance of payments is a summary of all the economic transactions between a country and the rest of the world that take place over a specific period of time, usually a year. It includes the current account, the capital account, and the financial account.

Capital Account

What is the capital account?
The capital account is a record of all the economic transactions between a country and the rest of the world that involve the transfer of capital assets, such as land, buildings, and machinery. It includes both long-term and short-term capital flows.
What are the components of the capital account?
The capital account is divided into two main components: direct investment and portfolio investment. Direct investment is the investment of a company in another company in order to gain control of that company. Portfolio investment is the investment of a company or individual in another company in order to earn a return on their investment.
What is the difference between direct investment and portfolio investment?
Direct investment is a long-term investment that is made in order to gain control of another company. Portfolio investment is a short-term investment that is made in order to earn a return on the investment.

Financial Account

What is the financial account?
The financial account is a record of all the economic transactions between a country and the rest of the world that involve the transfer of financial assets, such as stocks, bonds, and bank deposits. It includes both long-term and short-term financial flows.
What are the components of the financial account?
The financial account is divided into two main components: direct investment and portfolio investment. Direct investment is the investment of a company in another company in order to gain control of that company. Portfolio investment is the investment of a company or individual in another company in order to earn a return on their investment.
What is the difference between direct investment and portfolio investment?
Direct investment is a long-term investment that is made in order to gain control of another company. Portfolio investment is a short-term investment that is made in order to earn a return on the investment.

Net Errors and Omissions

What are net errors and omissions?
Net errors and omissions are adjustments made to the current account, capital account, and financial account to account for any discrepancies in the data. They can occur due to errors in reporting, timing differences, and other factors.
What is the purpose of net errors and omissions?
The purpose of net errors and omissions is to ensure that the balance of payments is in balance. If the current account, capital account, and financial account do not add up to zero, then net errors and omissions are used to make up the difference.

Reserve Account

What is the reserve account?
The reserve account is a record of the changes in a country’s official reserves. Official reserves are the assets that a country holds in order to meet its international obligations. They include gold, foreign currencies, and special drawing rights (SDRs).
What is the purpose of the reserve account?
The purpose of the reserve account is to ensure that a country has enough foreign exchange to meet its international obligations. If a country’s reserves fall too low, it may not be able to pay its debts or import essential goods and services.

FAQ: Why does a country import goods?

Answer: Countries import goods they can’t produce efficiently themselves, to access wider variety for consumers, or to obtain raw materials for production.

FAQ: What’s the difference between a trade surplus and a trade deficit?

Answer: A trade surplus means a country exports more goods than it imports. A trade deficit means a country imports more goods than it exports.

FAQ: How do tariffs impact international trade?

Answer: Tariffs are taxes on imported goods. They make imports more expensive, potentially protecting domestic industries, but can also lead to higher prices for consumers.

Which of the following is not a subaccount of the balance of payments?
(A) Current account
(B) Capital account
(CC) Financial account
(D) Net errors and omissions
(E) Reserve account

The current account records the flow of which of the following between a country and the rest of the world?
(A) Goods, services, income, and current transfers
(B) Capital
(C) Financial assets
(D) Net errors and omissions
(E) Reserve assets

The capital account records the flow of which of the following between a country and the rest of the world?
(A) Goods, services, income, and current transfers
(B) Capital
(C) Financial assets
(D) Net errors and omissions
(E) Reserve assets

The financial account records the flow of which of the following between a country and the rest of the world?
(A) Goods, services, income, and current transfers
(B) Capital
(C) Financial assets
(D) Net errors and omissions
(E) Reserve assets

Net errors and omissions are adjustments made to the current account, capital account, and financial account to account for which of the following?
(A) Discrepancies in the data
(B) Changes in a country’s official reserves
(C) The flow of goods, services, income, and current transfers between a country and the rest of the world
(D) The flow of capital between a country and the rest of the world
(E) The flow of financial assets between a country and the rest of the world

The reserve account records the changes in which of the following?
(A) A country’s official reserves
(B) The flow of goods, services, income, and current transfers between a country and the rest of the world
(C) The flow of capital between a country and the rest of the world
(D) The flow of financial assets between a country and the rest of the world
(E) The flow of goods, services, income, and current transfers between a country and the rest of the world, as well as the flow of capital and financial assets between a country and the rest of the world.

Answers:
1. (D)
2. (A)
3. (B)
4. (C)
5. (A)
6. (A)