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An accounting record of all monetary transactions
between a country and the rest of the world. It includes payments for
the country's exports and imports of goods, services financial, capital and
financial transfers. It is also known as balance of international payments
encompasses all transactions between a country’s residents and its
nonresidents involving good, services and income financial claims on and
liabilities to the rest of the world and transfers such as gifts.
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Types
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1.current account: shows the net amount a country is
earning if it is in surplus, or spending if it is in deficit. It is the sum
of the balance of trade (net earnings on exports minus payments for imports),
factor income (earnings on foreign investments minus payments made to foreign
investors) and cash transfers.
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2.Capital Account records the net change in ownership
of foreign assets. It includes the reserve account (the foreign exchange
market operations of a nation's central bank), along with loans and
investments between the country and the rest of world (but not the future
regular repayments/dividends that the loans and investments yield; those are
earnings and will be recorded in the current account).
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BOP identity assumes that any current account surplus
will be balanced by a capital account deficit of equal size – or alternatively
a current account deficit will be balanced by a corresponding capital account
surplus.
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“Balance of payments surplus" (or deficit a
deficit is simply a negative surplus) refers to the sum of the surpluses in
the current account and the narrowly defined capital account (excluding
changes in central bank reserves). Denoting the balance of payments surplus
as BOP surplus
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BOP
surplus = Current Account Surplus + Narrow Capital Account Surplus
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IMF Definition : Current a/c +Financial a/c +Capital
a/c +Balancing Item = 0
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While the overall BOP accounts will always balance when
all types of payments are included, imbalances are possible on individual
elements of the BOP such as the current account the capital account excluding
the central bank's reserve account or the sum of the two. Imbalances in the
latter sum can result in surplus countries accumulating wealth, while deficit
nations become increasingly indebted.
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The
term "balance of payments" often refers to this sum: a country's
balance of payments is said to be in surplus.
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