Bop Macroeconomics Identify and Define

BOP

Macroeconomics

Identify and define three components of a country's balance of payments

A country's balance of payments (BOP) comprises all of the nation's international monetary transactions (both credits and debits) at a specific period of time, and is usually calculated on a quarterly and/or annual basis. Theoretically, the BOP, or balance of credits and debits should be zero. The BOP is divided into three components: the current account, the capital account and the financial account (Heakal 2009). It is "commonly defined as the record of transactions between its residents and foreign residents over a specified period. Each transaction is recorded in accordance with the principles of double-entry bookkeeping, meaning that the amount involved is entered on each of the two sides of the balance-of-payments accounts" (Fieleke 1996: 2).

The current account includes the goods and services that flow in and out of the nation. These goods and services may include raw and manufactured items (regardless of whether they are bought, sold, or given as aid); fees related to tourism and transportation; service-based fees; engineering costs; and royalty fees. Goods and services make up the nation's Balance of Trade (BOT) and the BOT is thus a component of the current account. Earnings on investments, such as stocks, also comprise the current account component of the BOP (Heakal 2009). The last component of the current account is unilateral transfers. These include worker's salaries sent back to families at home as well as foreign aid given to other nations (Heakal 2009).

The capital account is comprised of international capital transfers, or the "acquisition or disposal" of non-financial and non-produced assets, like land or natural resources (Heakal 2009). "The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country" (Heakal 2009). It also consists of "the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income), the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, and, finally, uninsured damage to fixed assets" (Heakal 2009).

The final component of the BOP is the financial account, which is comprised of international monetary flows, such as "business, real estate, bonds and stocks" and "government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund" (Heakal 2009). Direct foreign investment is included in the financial account, as are private and public assets owned by foreigners, and private assets held abroad (Heakal 2009).