Question

Define the term balance of payments (BOP). Discuss the role of the current account, financial account and the official reserves accounts within the balance of payments.

Answer 1

BOP

The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.

The balance of payments (BOP), also known as balance of international payments, summarizes all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country. These transactions consist of imports and exports of goods, services, and capital, as well as transfer payments, such as foreign aid and remittances.

Current Account
The current account measures a country's trade balance plus the effects of net income and direct payments. When the activities of a country's people provide enough income and savings to fund all their purchases, business activity, and government infrastructure spending, then the current account is in balanceCurrent Account
The current account measures a country's trade balance plus the effects of net income and direct payments. When the activities of a country's people provide enough income and savings to fund all their purchases, business activity, and government infrastructure spending, then the current account is in balance.

Financial Account
The financial account measures changes in domestic ownership of foreign assets and foreign ownership of domestic assets. If foreign ownership increases more than domestic ownership does, it creates a deficit in the financial account. This increase means the country is selling its assets, like gold, commodities, and corporate stocks, faster than the nation is acquiring foreign assets.

The Official Reserve Account

The official reserve account, a subdivision of the capital account, is the foreign currency and securities held by the government, usually by its central bank, and is used to balance the payments from year to year. In the United States, the New York Federal Reserve serves as the Treasury's fiscal agent. The official reserves increases when there is a trade surplus and decreases when there is a deficit. Sometimes the central bank will use it to intervene in the foreign exchange market to set the exchange rate to some objective. However, foreign interventions rarely work because, while central banks only intervene for a short time, market forces are always influencing the exchange rate, so the market equilibrium will soon return after the intervention