1. What are the components of the Balance of Payments (BoP)

• BoP systematically summarizes economic transactions of a country.
• It records transactions between residents and the rest of the world.
• BoP has two main components:
  • Current Account.
  • Capital Account.

Current Account

• Deals with transactions that do not alter assets or liabilities.
• Comprises:
  • Visible trade: Export and import of goods (Merchandise).
  • Invisible trade: Export and import of services (Banking, Telecom, etc.).
  • Unilateral transfers: Gifts, Grants, Remittances.
  • Investment income: Income from factors of production (Profit, Interest, dividend on assets abroad).

Capital Account

• Records inflows and outflows of capital.
• Directly affects a country’s foreign assets and liabilities.
• Comprises:
  • Foreign Investment: FDI, FPI.
  • Loan: External Commercial Borrowing (ECB).
  • Banking Capital: NRI deposits.

Diagram: BoP

• BoP
  • Current Account
    • Merchandise (Exports & Imports of goods)
    • Invisibles
      • Services (Banking, Telecom, etc)
      • Factor Income
        1. Employee Compensation
        2. Investment Income (Profit, Interest, dividend on the assets abroad)
      • Transfers
        1. Gifts
        2. Grants
        3. Remittances
  • Capital Account
    • Foreign Investment (FDI, FPI)
    • Loan (ECB)
    • Banking Capital (NRI deposits)