Balance of Payment Account records the international economic transactions of a country
with the rest of
the world during a
particular period of time.
Transactions are to be recorded when the real resources or financial items involved undergo a legal
change of ownership which is taken to be the time the parties concerned enter the transactions in their
books. Transactions should be valued at market prices.
Classification of Items
of
BOP Account:
The items or components of BOP A/C are grouped into two broad categories- Current and Capital
Account.
§ Current Account transactions are divided into those involving goods, services,
incomes and
unrequited transfers.
These include visible exports and imports, shipment, travel, transportation,
investment income, private and official unilateral transfer (involving no quid pro quo) etc.
§ Capital Account covers transactions in financial assets and liabilities. In addition, it incorporates
supplementary information
on total changes in reserve holdings,
together with counterpart entries
that affect those changes not due to transactions. In order to
facilitate analysis, capital transactions are broken down by
using
several criteria: type of capital (represents direct and portfolio
investment, other capital and reserves), length
of maturity
and assets and liabilities. Reserves (official) are
composed of the
monetary gold, SDR allocation in
IMF, Reserve
position
in
The IMF,
use of IMF credit and existing claims on non-residents. For the most part reserves are
held by the central authorities, although funds are also held by deposit money banks but subject to
effective control by the Govt.
are also considered international reserves.
Analytical Framework for External Sector: A major purpose of BOP A/C is
to
provide an indication of
whether there exists an external imbalance and there is need
for policy adjustment in order to rectify such
an imbalance. The following concepts are
useful for the
above purpose.
The
narrowest definition of payments imbalance is related to the Trade
Balance (TB), indicating the difference
between exports and imports on an
FOB
basis.
The
Current Account Balance (CAB) is represented by transactions on goods, services, and income
plus
unrequited transfer. It shows the net change in financial assets arising from
an economy's real
transactions.
This corresponds to current surplus or deficit in the rest of
the world sector of the national accounts.
The
Basic Balance (BB) tries
to indicate the longer-run BOP position by placing ―below the
line‖ transactions that are
likely
to be reversed in the short-run (such
as short-term capital flow, changes in
official reserve and errors and commissions). Long-term capital flows are included ―above the line‖, in addition
to
current account items.
An Overall Balance (OB) is commonly considered as a measure of BOP ―performance‖. It places all current account items, capital movements and errors and omissions ―above the line‖, and changes in
reserves ―below the line‖. Thus a surplus
in overall balance represents a country's increase in reserves and a deficit in overall balance represents decrease in
reserves.