Balance of Payments (BOP)
The Balance of Payments registers
the payments that flow between one country and the rest of the
world during the financial year.
The Balance of Payments is divided into three
different categories:
Current account
Capital account
Financial account
a) Current account
This includes:
Purchase / sale of goods
(this subsection dominates commercial
balance).
Purchase / sale of services (transport,
tourism, insurances, royalties, company services, etc).
Workers
income (salary of workers)
Purchase
/ sale of dividends
b) Capital account
This includes:
Unilateral transfers received
and made by a country (debt relief, help, etc)
Acquisition / sale of non-financial
shares (furniture, industrial installations, land,
etc).
c) Financial account
This includes:
Investments carried out by national
companies abroad (installation of factories, purchase
of furniture, acquisition of shares, etc).
Investments of foreign companies
in the country.
Loans and deposits carried out
by nationals abroad and those carried out by foreigners in the
country.
The net balance of the movements registered in the three
previous sections will cause variations in the level of a country's
reserves (this includes foreign currency, gold and other shares
accepted national as modes of payment).
If the net balance is positive
(favourable balance for the country) the
level of reserves will increase.
If the balance is negative (unfavourable
balance for the country) the level of
reserves will decrease.
Detailed deficits in the balance of payments do not represent
a great risk, the problem arises when this balance is repeatedly
making a loss as this can cause a great drain on reserves, to
the point that they can run out.
If a country gets to a stage that
it doesn't have any reserves, it will not be able to buy abroad,
as it won't have any money to carry out payments. Therefore,
before this happens the Governement has to take measures to
try to correct this situation; these measures (for example,
depreciating the exchange rate) will be directed at slowing
down imports and encouraging exports.
