The balance of payments of a country is the record of all economic transactions between the residents of a country and the rest of the world in a particular period
(over a quarter of a year or more commonly over a
year). These transactions are made by individuals, firms and government bodies.
Thus the balance of payments includes all external visible and non-visible
transactions of a country during a given period, usually a year. It represents
a summation of country's current demand and supply of the claims on foreign
currencies and of foreign claims on its currency.
Components
·
Current Account: The 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. It is
called the current account as it covers transactions in
the "here and now" – those that don't give rise to future claims.
·
Capital Account: The 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). The term "capital account" is also used in the narrower
sense that excludes central bank foreign exchange market operations: Sometimes
the reserve account is classified as "below the line" and so not
reported as part of the capital account.
Imbalances
While the BOP has to balance overall,
surpluses or deficits on its individual elements can lead to imbalances
between countries. In general there is concern over deficits in the current
account. Countries with deficits in their
current accounts will build up increasing debt and/or see increased foreign
ownership of their assets.
The types of deficits that typically raise concern are
- A visible
trade deficit where a
nation is importing more physical goods than it exports (even if this is
balanced by the other components of the current account.)
- An overall current account deficit.
· A basic deficit which is the current account plus
foreign direct investment (but excluding other elements of the capital account
like short terms loans and the reserve account.
· A financial
market is a market in which people and entities can trade financial securities,
commodities, and other fungible items of value at low transaction costs and at
prices that reflect supply and demand. Securities include stocks and bonds, and
commodities include precious metals or agricultural goods.
· In economics,
typically, the term market means the aggregate of possible buyers and sellers
of a certain good or service and the transactions between them.
