INTRODUCTION

The balance of payments (BOP) is the method countries

use to monitor all international monetary transactions
at a specific period of time. Usually, the BOP is
calculated every quarter and every calendar year. All
trades conducted by both the private and public
sectors are accounted for in the BOP in order to
determine how much money is going in and out of a
country. If a country has received money, this is known
as a credit, and if a country has paid or given money,
the transaction is counted as a debit. Theoretically, the
BOP should be zero, meaning that assets (credits) and
liabilities (debits) should balance, but in practice this is
rarely the case.
 THREE MAIN
CATEGORIES

The Current Account,

The Capital Account
The Financial Account
 CURRENT ACCOUNT

The current account is used to mark the inflow and

outflow of goods and services into a country.
Earnings on investments, both public and private,
are also put into the current account. Within the
current account are credits and debits on the trade
of merchandise, which includes goods such as raw
materials and manufactured goods that are bought,
sold or given away .
If a country has a balance of trade deficit, it imports
more than it exports, and if it has a balance of trade
surplus, it exports more than it imports.
 CAPITAL ACCOUNT
The capital account is where all
international capital transfers are
recorded. This refers to the
acquisition or disposal of non-
financial assets (for example, a
physical asset such as land) and non-
produced assets, which are needed
for production but have not been
produced, like a mine used for the
extraction of diamonds.
 FINANCIAL ACCOUNT
In the financial account, international
monetary flows related to investment in
business, real estate, bonds and stocks are
documented. Also included are government-
owned assets such as foreign reserves, gold,
special drawing rights (SDRs) held with the
International Monetary Fund (IMF), private
assets held abroad and direct foreign
investment. Assets owned by foreigners,
private and official, are also recorded in the
financial account.
 BALANCE OF TRADE
The trade balance subtracts imports
from exports. Imports are any goods
and services that are made in a
foreign country and bought by a
country's residents. You think of
imports as being shipped in from a
foreign country. But, even if it's
purchased by residents while
traveling abroad, it's still an import.
 Exports are any goods or services
sold by a native resident or business
to a foreign one. It can be a pair of
jeans you mail to a friend or signage
a corporate headquarters transfers
to its foreign office. If the foreigner
pays for it, then it's an export.
FAVORABLE TRADE

Balance Countries try to create trade policies that

encourage a trade surplus. They consider this to be a
favorable trade balance because it's like making a profit
as a country. They prefer to sell more and receive more
capital for the residents.
That translates into a higher standard of living. The
companies gain a competitive advantage in expertise by
producing all the exports. They hire more workers,
reducing unemployment and generating even more
income
For example, Hong Kong has a trade deficit. But its
imports are raw materials that it converts into finished
goods and exports out. .
 UNFAVORABLE TRADE
Trade deficits are usually an unfavorable
balance of trade. That's because most countries
with trade deficits import more in consumer
products than they export in raw materials
. China and Japan have both become dependent
on exports to drive economic growth. They must
purchase significant amounts of U.S. Treasuries
to keep the dollar's value high and the value of
their currencies low. That's how they keep their
exports competitively priced, and maintain their
trade surplus
 BALANCE OF PAYMENT
ACCOUNT
A Balance of Payment Account is a systematic
record of all economic transactions between
residents of a country and the rest of the world
carried out in a specific period of time.
Briefly put, Balance of Payment Account is a
summary of international transactions of a country
for a given period (i.e., financial year). It records a
countrys transactions with the rest of the world
involving inflow and outflow of foreign exchange.
In short BOP Account is a summary statement of
transactions in foreign exchange in a year.
 VISIBLE AND INVISIBLE
ITEMS
Visible items refer to items relating to trading in goods
with other countries. For example export and import of
goods (like machinery, tea, etc.) are called visible
items because goods are visible items and can be
verified by Custom officials. Invisible items refer to
items relating to trading of services with other
countries and unilateral transfers. Export and import of
services are called Invisible items because services are
not seen crossing the border. All types of services like
services of shipping, banking, tourism, investment
services and unilateral transfers are invisible items.