BOP is a set of accounts (balance sheet) which shows all the economic transactions which take place between the residents of one country and the residents of all other countries during a given time period, usually one year.
Components of BOP
1. Current Account
-This account includes both visible and invisible items.
-The visible items (imports and exports) consist of physical merchandise of all kinds.
-The invisible imports and exports are mainly services and include net income from services rendered by residents to non-residents (tourism, shipping, insurance and banking) balance of gifts and transfer of migrant funds, net grants by the government to other countries, interest, profits & dividends.
-An excess of imports over exports will cause current account deficit and the reverse will lead to current account surplus.
2. Capital Account
This account reduces both long – term and short – term capital movements between the home country and all other countries. The long – term capital movements include direct investments, portfolio investments (buying securities of a foreign company) and inter-governmental loans. The short – term capital movements include all forms of short – term private lending and short term investments.
3. Balancing Item
This item is included because of errors and omissions in the above accounts.
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