Balance of Payments
Balance of Payments
The balance of payments(BOP) is an accounting of a country’s international transactions over a certain time period. It shows the sum of the transactions—purely financial ones, as well as those involving goods or services—between individuals, businesses and government agencies in that country and those in the rest of the world.
What is the formula for the balance of payments?
Firstly, there are two categories in the BOP: the current account (CA) and the capital and financial account (CFA). If a transaction creates a liability, like selling a bond to another country, that gets counted in the capital and financial account. But if a transaction doesn’t create a liability, the transaction gets counted in the current account.
The formula for calculating the balance of payments is calculated as—Current account + capital account + financial account + balancing item = 0.
Therefore, the capital account has two sub-accounts:
- Firstly, Capital transfers include debt forgiveness and migrants’ transfers (goods and financial assets accompanying migrants as they leave or enter the country).
In addition, capital transfers include the transfer of title to fixed assets and the transfer of funds linked to the sale or acquisition of fixed assets, gift and inheritance taxes, death duties, uninsured damage to fixed assets and legacies.
- Secondly, the Acquisition and disposal of non-produced, non-financial assets represent the sales and purchases of non-produced assets. They are such as the rights to natural resources, and the sales and purchases of intangible assets, such as patents, copyrights, trademarks, franchises and leases.
|balance of payments||a record of all funds going in and out of a country|
|current account (CA)||a record of international transactions that do not create liabilities|
|capital financial account (CFA)||a record of international transactions that do create liabilities; the capital and financial account includes official and private sales and purchases of financial assets, such as bonds.|
|factor income||the net of payments received and payments made on investments overseas; for example, if an American resident owns stock in a Japanese car company, any income from that stock is factor income in the U.S. current account.|
|remittances||money that is received from another country that is not in exchange for a good, service, or financial asset; for example, when someone is working abroad and sends money home to their family, that is a remittance.|