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Questions
Bring out the components of balance of payments account.
Explain various components of balance of payments.
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Solution
Components of BOPs:
The credit and debit items are shown vertically in the BOP account of a country. Horizontally, they are divided into three categories etc.
- The Current Account: It includes all international trade transactions of goods and services, international service transactions (i.e. tourism, transportation, and royalty fees), and international unilateral transfers (i.e. gifts and foreign aid).
- The Capital Account: Financial transactions consisting of direct investment and purchases of interest-bearing financial instruments, non-interest-bearing demand deposits, and gold fall under the capital account.
- The Official Reserve Assets Account: Official reserve transactions consist of movements of international reserves by governments and official agencies to accommodate imbalances arising from the current and capital accounts.
The official reserve assets of a country include its gold stock, holdings of its convertible foreign currencies and Special Drawing Rights (SDRs), and its net position in the International Monetary Fund (IMF).
Balance of payment (BOP) Account Chart
Credit (Receipts) – Debit (Payments) = Balance [Deficit (–), Surplus (+)]
Deficit if Debit > Credit
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