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International Trade and Finance

Notes economic transactions between the residents of a given country and of the residents of the rest of the
world in an accounting period (viz. a year).” The system of BOP accounting, some of the concepts and
terminologies used in the BOP expression and the interpretation of the BOP categories are of utmost
importance to any student of international economics. Despite efforts by international organizations
to secure uniformity of classification and presentation, the BOP accounting format differs between
different countries. Even the term BOP is somewhat obscure. Yeager, for example, draws attention to
the word ‘payments’ in the term BOP; this gives a false impression that the set of BOP accounts
record items which involve only payments. The truth is that the BOP statements record both payments
and receipts by a country. It is, as Yeager says, more appropriate to regard the BOP as a ‘balance of
international transactions’ by a country. We will return to this question (and other related questions)
later in the chapter. First let us study the system of BOP accounting.

The word ‘balance’ in the term BOP does not imply a situation of comfortable
equilibrium; it only means that it is a balance sheet of receipts and payments having
an accounting balance.

11.2 Components of Balance of Payments

The BOP transactions include all the foreign receipts of and payments by a country during a given
year. The receipts include all the earnings and borrowings of foreign exchange, and they are recorded
as credit items. The payments include all the spending and lendings of foreign exchange, and they
are recorded as debit items. As such, all the foreign receipts are financial inflows and all the foreign
payments are financial outflows in an year. In the purely accounting or book-keeping sense the balance
of payments must always balance, because the BOP is a schedule of debit and credit transactions
which must necessarily be equal. While the equality of debits and credits (i.e. accounting balance) is
inevitable, it does not necessarily follow that the BOP equilibrium is guaranteed. Accounting balance
is consistent with BOP disequilibrium i.e. deficits and surpluses in the BOP.
The BOP statements basically include six major accounts which are as follows :
1. Goods Account
2. Services Account
3. Unilateral Transfers Account
4. Long-term Capital Account
5. Short-term Capital Account
6. International Liquidity Account.
Goods Account
It includes the value of merchandise exports and the value of merchandise imports. These items of
foreign exchange earnings and spendings are called as “visible” items in the BOP. If the receipts from
exports of goods happen to be equal to the payments for the imports of goods, we describe the
situation as one of zero “goods balance.”
Otherwise there would be either a positive or a negative goods balance depending on whether we
have receipts exceeding payments (positive) or payments exceeding receipts (negative). Positive goods
balance is regarded as ‘favourable’ for a country and negative goods balance is regarded as
‘unfavourable.’
Service Account

Just as a country exports goods and imports goods (they may be final consumer goods, intermediate
capital goods or raw materials) a country also exports and imports what are called as ‘services.’
Accordingly, services transactions are regarded as ‘invisible’ items in the BOP. They are invisible in

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