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Balance of Payments (BoP)
The balance of payments (BoP) is an accounting statement that summarizes all economic flows between a country and the rest of the world in a particular period. It includes all payments and receipts for goods, services, investment, and transfers.
Components of BoP:
1. Current Account:– Exports and imports of goods and services- Receipts and payments for tourism, remittances, and other current transfers
2. Capital Account:– Foreign direct investment (FDI)- Portfolio investment- Other investment flows
3. Financial Account:– Foreign liabilities- Foreign assets
Balancing the BoP:
The BoP is balanced when the sum of all payments and receipts is equal to zero. If the BoP is not balanced, it means that the country is either borrowing or lending money from the rest of the world.
Key Significance:
Important Notes:
Example:
If a country exports goods worth $10,000 and imports goods worth $8,000, its current account balance would be $2,000. If it also receives foreign investment of $5,000 and has foreign liabilities of $3,000, its overall BoP balance would be $2,000.
Balance of Payments (BoP) Equation:
BoP = CA + CA + FA = 0
where:
BoP is the balance of paymentsCA is the current account balanceCA is the capital account balanceFA is the financial account balance
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