The Theory and Implementations of The Balance of Payments (BOP) :: Economics

The Theory and Implementations of The Balance of Payments (BOP) To develop country’s economic strength under the tendency of globalization, governments always seek to achieve two macroeconomic objectives, i.e. stable growth of internal economy and balanced development of external economic activities. The former can be realized by effectively adjusting Economic Growth, Unemployment and Inflation. However, how to realize the latter? An external macroeconomic variable is needed. In practice, the Balance of Payments fulfills this responsibility. (A). Balance of Payments (BOP used in following text), in principle, is a record of the country’s transactions with the rest of the world. It shows the country’s payment s to or deposits in other countries (debits) and its receipts or deposits from other countries (credits)[1]. The BOP account[2] also shows the balance between these debits and credits under various headings, which are categorized into the Current Account, the Capital Account and the Financial Account, which compose the main elements of balance of payments. The Current Account largely measures flow of real resources including exports and imports of goods and services, income receivable and payable abroad, and current transfers from and to abroad. It is normally divided into three subdivisions (Figure 1). Trade in goods account (often as the trade balance) The total value of exports of goods, subtracting the total value of imports of goods. Trade in services account Imports and exports of services, such as banking and insurance, transport services, law, accountancy, management consultancy and tourism. Investment incomes Interest, profit and dividends flowing into and out of the country. Transfers of money Two sectors: government transfers and transfers made by other sectors. Government transfers include contributions to international organisations (e.g. UK to EU budget) and foreign aid. The ‘other sectors’ section many highlights the transfer of assets by individuals to foreign bank accounts. The Capital Account measures external transactions in capital transfers, and in acquisition or disposal of non-produced, non-financial assets, which include land and subsoil assets, patents and copyrights etc. Capital transfers are transfers of ownership of a fixed asset or the forgiveness of a liability. The Financial Account records transactions in financial assets and liabilities between residents and non-residents. It shows how an economy's external transactions are financed. Transactions in the financial account are classified into direct investment, portfolio investment, other investment, and reserve assets[3] (Figure 2). Direct investment Money flows across national boundaries for the purpose of investing and it is thus either a credit or a debit item. Portfolio investment Changes in the holding of paper assets, such as company shares and bonds. Other investment It comprises loans, currency, deposits, and short and long-term trade credits, financial derivatives and other accounts receivable and payable. Reserve assets This refers to the reserves of gold, special drawing rights (SDRs) and