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Economics: BOP(Balance of Payment)

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The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period of time.

A complete BoP account comprises the following two broad accounts: (a) Current Account; and (b) Capital and Financial Account.

Current Account :

The current account deals with the trade of goods and services between two countries.In international trade “invisibles” includes :

  • Services (like transportation, financial services, travel, telecommunication, computer services and professional services)
  • Transfer (It includes remittances from the Indian working abroad)
  • Income (These are the income earned like profits, interest and dividends from the ownership of overseas assets by Indian companies, government and individuals)

While “goods ” are termed as visibles.

If Current Account balance is positive , then it is termed as Current account surplus and if it is negative then It is termed as Current Account Deficit(CAD).

Balance of Trade = export of goods –Import of goods. This is a part of current account balance.

Capital account Transactions:

It basically deals with investment and borrowings.  For example, foreign investment in India, how much money borrowed by  Indian companies. Similarly, Indians to open bank accounts in foreign countries; invest abroad; hold assets abroad etc.

It includes:

  • Foreign direct investment (FDI) refers to long term capital investment such as the purchase or construction of machinery, buildings or even whole manufacturing plants.
  • FII(Foreign Institutional Investment)or Portfolio investment refers to the purchase of shares and bonds in Indian share market by the foreigners.
  • ECB(External Commercial Borrowing) Money borrowed by Commercial companies from abroad.
  • Sovereign Debt : Money borrowed by Govt of India