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

The Theory and Implementations of The Balance of Payments (BOP)To gear up countrys economic strength under the tendency ofglobalization, presidential terms invariably seek to achieve two macroeconomicobjectives, i.e. stable growth of inhering economy and oddmentddevelopment of external economic activities. The former fag end berealized by effectively adjusting Economic Growth, Unemployment andInflation. However, how to realize the latter(prenominal)? An externalmacroeconomic variable is needed. In practice, the Balance of Paymentsfulfills this responsibility. (A). Balance of Payments (BOP apply in following text), in principle,is a record of the countrys transactions with the rest of the world.It shows the countrys payment s to or deposits in other countries( accounts) and its receipts or deposits from other countries (credits)1.The BOP direct2 also shows the balance between these debits andcredits under various headings, which are reason into the CurrentAccount, the Capit al Account and the Financial Account, which composethe main elements of balance of payments.The Current Account largely measures flow of real resources includingexports and imports of goods and services, income receivable andaccount payable abroad, and current transfers from and to abroad. It isnormally divided into three subdivisions (Figure 1). cunning in goods account (often as the trade balance)The total value of exports of goods, subtracting the total value ofimports of goods.Trade in services accountImports and exports of services, such as banking and insurance,transport services, law, accountancy, precaution consultancy andtourism.Investment incomesInterest, profit and dividends flowing into and out of the country.Transfers of moneyTwo sectors government transfers and transfers made by other sectors.Government transfers include contributions to internationalorganisations (e.g. UK to EU budget) and international aid. The othersectors section many highlights the transfer of assets by individualsto foreign bank accounts.The Capital Account measures external transactions in superiortransfers, and in acquisition or disposal of non-produced,non-financial assets, which include land and undersoil assets, patentsand copyrights etc. Capital transfers are transfers of ownership of afixed asset or the forgiveness of a liability.The Financial Account records transactions in financial assets andliabilities between residents and non-residents. It shows how aneconomys external transactions are financed. Transactions in thefinancial account are classified into direct investment, portfolioinvestment, other investment, and allow for assets3 (Figure 2).Direct investmentMoney flows across national boundaries for the purpose of putand it is thus either a credit or a debit item.Portfolio investmentChanges in the holding of paper assets, such as company shares andbonds.Other investmentIt comprises loans, currency, deposits, and short and long-term tradecredits, financia l derivatives and other accounts receivable andpayable.Reserve assetsThis refers to the reserves of gold, special drawing rights (SDRs) and