What r the components of BOP?

Every country indulges itself in economic transactions with other countries. In this process, it receives or makes payment from and to other countries. The statement that keeps the record of all these economic transactions of a country with the rest of the world is known as Balance of Payment (BoP). BoP accounts consists of the following accounts.

  1. Current Account

  2. Capital Account

Current Account

Current Account is the account which maintains the records of imports and exports of goods and services as well as unilateral transfers. It includes

  • Export and Import of goods (tangibles)

  • Export and Import of services (intangibles)
  • Unilateral Transfers ( one sided transactions from one country to another such as, gifts, donations, etc.)

Capital Account

Capital Account refers to that account that records all the transactions which causes change in assets or liabilities of the government or of the domestic residents. The following are the various component of capital account.

  1. Foreign Direct Investments (FDI): It refers to the long run investment in capital such as, purchase of a building or plant. For example, purchase of a foreign company by an Indian business group in America.

  2. Portfolio Investments: The purchase of an asset in rest of world, in the form of long term investment, without legal ownership or control over that asset is called as Portfolio Investment. For example, purchase of shares of a company in abroad. 

  3. Other investments include loans and capital flows into bank accounts.



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Main Components of a Balance of payments Account


I. Current Account

(A) Goods

General merchandise, goods for processing, repairs on goods produced in ports by carries and non-monetary gold.


(B) Services

Transportation, travel, communications, construction, financial and computer services, royalties and license fees, other professional and business services.


(C) Income

Direct investment income, portfolio investment income, and compensation of employees


(D) Current Transfers

Government current transfers, workers' remittances and other current transfers.


II. Capital and Financial Account

1. Capital Account

(A) Capital transfers

Government and private transfers of fixed assets and forgiveness of liabilities.


(B) Non-produced and Non-financial assets

Land and subsoil assets, patents, copyrights, trademarks, franchises.


2. Financial Account

(C) Direct Investment

External investments with lasting interest in enterprises.


(D) Portfolio Investment

External investments in securities and financial derivatives.


(E Other investment

External investments other than reserves, direct and portfolio investments. For example, short- and long-terms loans, trade credits, currency holdings and deposits, other accounts receivable and payable.


(F) Reserve Assets

Monetary gold, foreign exchange assets and other claims.


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Balance of Payments
The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and the residents of foreign countries during a given period of time. It is an important index, which reflects the true economic position of a country, whether the country is a creditor country or a debtor country, and whether its currency is rising or falling in its external value. There are various types of monetary transactions that take place between two countries:
The export and import of a goods and services
The international lending and borrowing Servicing of foreign debts and their final repayments.

The balance of payment has two accounts, namely, current account and capital account. The following table shows the components of the current account.

Balance of Payments of India
Current Account Rupees in Crores
Credits Debits Net
I. Merchandise
(i) Private
(ii) Government
II. Non-monetary Gold Movements
III. Invisibles
(i) Travel
(ii) Transportation
(iii) Insurance
(iv) Investment Income
(v) Govt. not included elsewhere
(vi) Miscellaneous
(vii) Transfer Payments
(a) Official
(b) Private
Total Capital Account (I+II+III)

The items in the table are self-explanatory. One can see that the current account consists of visible exports and imports. The visible exports and imports are those, which are actually recorded at the ports.

The following table shows the components of the capital account.

Balance of Payments of India
Current Account Rupees in Crores
Credits Debits Net
I. Private
(i) Long Term
(ii) Short Term
II. Banking
III. Official
(i) Loans
(ii) Amortisation
(iii) Miscellaneous
Total Capital Account (I+II+III)

The above items are self-explanatory. The capital account reflects the real monetary position of a country in the international capital market.

Changes in the balance of payments produce deep repercussions on the functioning of the economy. A ‘surplus’ in the balance of payment generally means an inflow of income into the country, more economic activity and more employment for the people. A deficit in the balance of payments, on the contrary, implies and outflow of income abroad, less of economic activity and less of employment at home.

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