Components of Balance of Payments

Components of Balance of Payments

The BoP account has three main components:
· The Current Account
· The Capital Account
· Official Reserves

The Current Account

Trade in Goods

The current account records all the income related flows. These flows could arise on account of trade in goods and services and transfer payments among countries. Trade in goods consists of exports and imports.
As explained earlier, a country’s export i.e., sales of goods to resident of another country, are a source of reserves. Similarly, a country’s imports i.e. , purchases of goods from another country are a use of reserves
Thus, they enter on the credit and the debit side of the BoP account respectively.

Trade in Services

Trade in services consists of payments and receipts on account of interest, dividend, professional services, income on assets like patents and copyrights, tourism, transport, insurance, income from other physical property, banking and other financial services, consultancy services and other factor services involving residents of two countries.

Transfer Payments

Transfer payments include all unilateral transfers, i.e., transfers without any corresponding exchange of goods and services. Examples are remittances and gifts to friends and relatives, private donations, scholarships, inter-governmental aids and grants, and pension.

The Capital Account

The capital account records movements on account of international purchase or sale of assets. Assets include any form in which wealth may be held – money held as cash or in the form of bank deposits, shares, debentures, other debt instruments, real estate, land, factories, antiques, etc.
Any purchase of a foreign asset by a resident is entered as a debit item in that country’s BoP account, while any purchase by a foreign resident of a domestic asset is recorded as a credit item.

Official Reserves

Official reserves include gold, reserves of convertible foreign currencies; SDR’s and balances with the IMF, which is the means of international payment.
Foreign currencies may be held in the form of balances with foreign central banks, or as foreign government securities.
The official reserves account reflects the amount of these ‘means of international payment’ acquired or lost during the period for which the BoP account is constructed.

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