Balance of payment (BOP)
The Major components of the balance of payment (BOP). The BOP accounting system can be divided conceptually into four major accounts. The first two accounts are- the current account and the capital account-the records purchases of goods, services, and assets by the private and public sectors. The official reserves account reflects the impact of central bank intervention in the foreign exchange market. The last account -errors and omissions-captures mistakes in recording BOP transactions.
1. Current Account:
The records four types of transactions among residents of different countries
1. Exports and imports of goods (or merchandise)
2. Exports and imports of services
3. Investment income
2. Capital Account:
The second major account in the balance of payment accounting system is the capital account, which records capital transactions- purchases and sales of assets-between residents of one country and those of other countries. The capital account can be divided into two categories:
(a) Direct foreign investment (DFI)
(b) Portfolio investment.
Official Reserves Account: The third major account in the BOP accounting system is the official reserves account. The official reserves account records holdings of the reserves held by a national government. These reserves are used to intervene in the foreign –exchange market and in transactions with other central banks. Official reserves comprise four types of assets:
2. Convertible currencies
4. Reserve position at the IMF
Errors and omissions: The last account in the BOP accounting system is the errors and omissions account. One truism of the BOP accounting system is the BOP balance. In the theory, the following equality should be observed.
Current Account + Capital Account + Official Reserves Account =0
However, equality is never achieved in practice because of measurement errors. The account is called errors and omissions is used to make the BOP balance in accordance with the following equation:
Current Account + Capital Account + Official Reserves Account + Errors and omissions =0