Question

What are the 3 main sections of the Balance of Payments Accounting System

Answer 1

The balance of payments is a systematic record of all the financial transactions of a country with the rest of the world. BOP system is made up of three components :

1.Current Account: This account can be divided further into three parts:

• Merchandise Account which includes all the transactions related to import and export of good and services.
• Income account/Investment income which includes income from rents, interests and profits.
• Transfers which includes foreign aids, gifts, donations, remittances etc.

2. Capital Account: This account includes transactions which are related to buying and selling of foreign assets and liabilities. It includes foreign direct investments, portfolio investments, loans etc.

3. The Balancing Account: This account records all official reserve transactions made by the central bank whenever there is a BOP deficit or surplus. It includes assets such as gold and international currencies.

Balance of Payments = Current account + Capital Account + Balancing Account

Sum of BOP including all the three accounts is always equal to zero.