Question

INSTRUCTIONS

1. YOUR GRADE DEPENDS ON YOUR CONVICTION, CORRECTNESS, ELABORATION AND ELUCIDATION OF YOUR ANSWERS.
2. EACH COUNTS 17 POINTS.
3. YOU SHOULD WRITE ABOUT ONE PAGE SINGLE SPACED PER QUESTION

Describe the different accounts of the balance of payments.

Answer 1

The balance of payments is broadly divided into 3 types. They are:

1. Current Account
2. Capital Account
3. Financial Account

CURRENT ACCOUNT

It is used to record all the cash inflows and outflows into the country which are associated with goods and services. The earnings on the investment done in public or private entities are also recorded in this account. Goods include the raw materials and manufactured goods that are bought, sold, or given away and services include tourism, transportation, engineering, business service fees, royalties from patents, and copyrights. The balance is credited or debited in the current account according to the nature of cash flow i.e. inflow will be credited and outflow will be debited. This combined trade of goods and services makes the balance of trade. This is the major component of the balance of payments which also reflects whether the country has a trade deficit or surplus. Trade surplus means export is greater than import and trade deficit means imports are greater than export. The income received as a dividend is also recorded here.

CAPITAL ACCOUNT

In this account, all international capital transfers are recorded. Capital transfers like acquisition or disposal of non-financial assets, non-produced assets (gold, diamond, iron, coal). This account also records monetary inflows or outflows which occur from debt forgiveness or transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets, the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies and, finally, uninsured damage to fixed assets. This account also gives us an idea regarding changes in domestic ownership on foreign assets and foreign ownership on domestic assets.

FINANCIAL ACCOUNT

The international monetary inflows or outflows which are due to investment in the business, real estate, bonds, and stocks that are kept documented by the country. This also includes government-owned assets like foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund (IMF). The private assets that are held abroad and direct foreign investment are also a part of this account. Assets present in the country that are owned by foreigners, private and official, are also included in the financial account. It is the smallest among all other accounts present in balance of payments. The capital account transactions are very rare.