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

The Theory and Implementations of The sense of balance of Payments (BOP)To develop countrys stinting persuasiveness under the tendency ofglobalization, governments always seek to achieve two macroeconomicobjectives, i.e. stable growth of internal economy and balanceddevelopment of external economic activities. The former can berealized by effectively adjusting Economic Growth, Unemployment andInflation. However, how to realize the latter? An externalmacroeconomic variable is needed. In practice, the Balance of Paymentsfulfills this responsibility. (A). Balance of Payments (BOP used in following text), in principle,is a record of the countrys proceeding with the rest of the world.It shows the countrys payment s to or deposits in other countries(debits) and its receipts or deposits from other countries (credits)1.The BOP history2 also shows the balance between these debits andcredits under various headings, which are categorized into the up-to-dateAccount, the Capital Account and t he 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 andpayable abroad, and current transfers from and to abroad. It is ordinarily divided into three subdivisions (Figure 1).Trade 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, management 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. administration transfers include contributions to internationalorganisations (e.g. UK to EU budget) and foreign aid. The othersectors section many highlights the transfer of assets by individualsto fore ign bank accounts.The Capital Account measures external transactions in capitaltransfers, and in acquisition or disposal of non-produced,non-financial assets, which include land and subsoil assets, patentsand copyrights etc. Capital transfers are transfers of ownership of a persistent 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 investing, portfolioinvestment, other investment, and reserve assets3 (Figure 2).Direct investmentMoney flows across national boundaries for the purpose of investingand it is therefrom 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, financial derivatives and o ther accounts receivable andpayable.Reserve assetsThis refers to the reserves of gold, special drawing rights (SDRs) and