BoP.docx - Balance of Payments What is the Balance of...

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Balance of Payments What is the Balance of Payments? The balance of payments (BOP) records all of the many financial transactions that are made between consumers, businesses and the government of a country with people across the rest of the World. The BOP figures tell us about how much is being spent by the country’s consumers and firms on imported goods and services, and how successful the country’s firms have been in exporting to other countries and markets. It is an important measure of the relative performance of the country in the global economy. Components of BOP There are three main parts of the BOP account. 1. The current account The record of country’s imports and exports of goods and services, plus incomes and transfers of money to and from abroad. There are four subdivisions. a. Trade in goods account – records imports and exports of physical goods (visibles). Balance in this account is called balance on trade in goods or balance of visible trade. b. Trade in services account – records imports and exports of services eg. transport, tourism, insurance. Balance in this account is called services balances. Balance of both the accounts called balance of trade. c. Income flows – consist of wages, interest and profits flowing into and out of the country. d. Current transfers of money – include govt contributions to and receipts from other countries and international organizations, and international transfers of money by private individuals and firms. 2. The capital account The record of the transfers of capital to and from abroad associated with acquisition and disposal of fixed assets, transfer of funds by migrants, payment of grants by govt for overseas projects. 3. The financial account The record of the flows of money into and out of the country for the purposes of investment or as deposits in banks and other financial institutions. Concerned with purchase and sale of assets. Includes foreign direct investments (FDI)-long term; portfolio investments eg. company shares- short term; flows to and from the reserves. The Effects of Changes in the Balance of Payments on an Economy Consider the effects of a slowdown in exports and a faster growth in imports of goods and services caused by a rise in the value of sterling against other currencies that leads to a worsening of the balance of payments . This has further effects on the economy as a whole: Reductions in demand in the circular flow: There will be a net fall in AD because

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