The document defines key terms related to a country's balance of payments (BOP). The BOP is an accounting of a country's international transactions over a period of time. It has three main components: the current account, the capital and financial account, and changes in reserves. The current account covers trade in goods and services, as well as income from factors of production. The capital and financial account covers capital transfers and financial transactions such as foreign direct investment and borrowing. Changes in reserves represent changes in a central bank's holdings of foreign currency assets.

1. Categories and Definitions
 Balance of Payments (BOP) is an accounting of a
country's international transactions over a certain
time period, typically a calendar quarter or year.
 It shows the sum of the transactions (purely financial
ones, as well as those involving goods or services)
between individuals, businesses, and government
agencies in that country and those in the rest of the
world.
 Every international transaction results in a credit and
a debit.
 Transactions that cause money to flow into a country
are credits, and transactions that cause money to
leave a country are debits
 We give the payments coming in a plus sign, and the
payments going out a minus sign.
Balance of Payments:

2. Major principles of drawing and
determination of BoP
• account of operations between residents and
non-residents
• account of operations by the system of double
booking
• reflection of flows, instead of stocks
• cost estimation of operations and transfers of
sums denominated in different currencies in
one accounting unit
• reflection of operations by types and sectors of
economy
Major items of balance of payments
Balance of payments consists of the following
components:
current account,
capital and financial resources account
reserve assets.
Current account reflects the movement of all
goods and services of factor profit and current
transfers between residents and non-residents.
Capital account includes operations with capital
transfers and non-financial assets.

3. Financial account consists of all operations
changing international investment position
Here's a synopsis first:
Current Account
Trade -
Exports
Imports
Private Transfers
Official Transfers
Factor Services
Financial Account (Capital Account)
Foreign Direct Investment
Portfolio Investment
Borrowing and Lending
Changes in Reserves
Errors and Omissions
Balance of Payments

4. Current Account
Trade
Exports (X)
Exports are goods or services sold to foreigners. They
require that foreigners make payments to us.
(+) They take a plus sign.
Macro Note: since exports are a source of total
aggregate demand for nationally-produced goods,
changes in exports will produce corresponding
changes in national income. If other country’s
incomes rise, they will likely import more of our
goods, raising out exports.
The World Bank figures distinguish between
"Merchandise Exports" (Exports of things that
you can touch) and exports of services, like
shipping, tourism, and communications.
Goods. This item includes the trade of goods, including goods
for processing with the further re import-re export, repair of
capital movable goods such as tonnage, goods acquired by
hauling units in ports, non-monetary gold
Services cover all categories of services, particularly, freight
and passenger traffic, tourism and others, including mainly
technical assistance in the form of consulting and training
services, geophysical, constructive, communication and
governmental services.

5. Imports (M)
Imports are goods or services purchased from
foreigners. They require that we make payments to
foreigners.
(-) They take a minus sign.
Macro Note: Generally imports will rise or fall as total
national income rises or falls, since they will represent
some part of national demand for goods. In that case
both demand for imports and demand for locally-
made goods will rise. If for some reason people
substitute away from domestically-made goods
toward imports, that will tend to lower national
income.
Additionally, some countries may have export
industries that require significant amounts of imports.
The World Bank figures distinguish between
"Merchandise Imports" (Imports of things that
you can touch) and imports of services.
The sum (X-M) gives you the "trade balance."

6. Private Transfers into our country mean that foreigners
make payments to us. (Suppose your uncle in Japan
sends you a check.)
(+) They take a plus sign.
Private Transfers to other countries are simply payments
to people in those countries. Suppose you help to
support your children studying abroad.
(-) They take a minus sign.
 Often private (i.e. made at individual initiative) transfers are
made by workers who go abroad and send part of their
earnings home, e.g. Indians in the Gulf countries., Turks in
Germany, Filipinos in Singapore. So you would expect the Gulf
countries to show net negative private transfers, and India
to show net positive private transfers.
Private Transfers
These simply mean payments made between private citizens that are
not purchases of anything. Most often they are payments between
family members

7. Official Transfers
Like Private Transfers, these are
payments that are not purchases of
anything that are made by or to
governments.
Official Transfers into our country mean that foreign
governments (or multilateral agencies) make payments to
us.
(+) They take a plus sign.
Official Transfers to other countries are simply payments
by our government to other countries.
(-) They take a minus sign.
 Basically these are government-to-government payments,
though some may go through international agencies like the
United Nations.
 This can be termed "aid" of various kinds; when the United
States, for example, got large payments from Japan and other
countries to defray costs involved in the Gulf War, those
represented large positive official transfers in the U.S. BoP.
 For only a few countries, however, are official transfers likely
to be a significant part of the overall BoP.
Macro note: Large incoming transfers will enable a
country to import more — in fact that’s often the intent
of foreign aid, and many countries insist that their "aid"
be spent on their exports

8. Factor Services
"Factor" here means "factor of
production," and in this context factor
services are payments for the use of
either physical capital, like a factory, or
financial capital, like a loan.
Payments to us from foreigners that represent interest on
loans that we made to them, or profits from physical
capital (like factories) owned by our citizens, go into factor
services with a plus (+) sign.
Payments by us to foreigners that represent interest on
loans or profits from physical capital that they own in our
country go into factor services with a minus (-) sign.
 You may think it is weird that interest payments on a loan go
into the current account while principal payments go into the
capital account. It is. But this is how accountants see the
world.
Macro Note: Countries that borrow a lot will show very large
amounts of interest payments out, sometimes to the extent that
half of their exports are going to pay interest on loans. (One
reason why interest payments balloon like this is that when a
country has trouble making payments on debt, it may enter into
a "rescheduling" agreement that postpones payments of loan
principal while continuing interest payments. That lets lenders
keep the loans on their books as "performing." The macro effect
of this debt burden, however, is that the country consumes a lot
less than it makes, and this can tend to reduce gross fixed capital

9. formation, crippling prospects for future growth. Not to mention
lowering overall consumption, which often hits the poor hardest.
Capital Account Capital /Financial account
Financial Account (asset-related payments)
Foreign Direct Investment
Payments to purchase fixed capital assets, like factories.
• Direct investment- Direct investor is the
investor, which has a stockholding or have not
less than 10% share in a company, in which
he/she invested
• Direct investment can have the form of goods,
immovable property and financial resources
• In the balance of payments direct investments
are classified as direct investments abroad,
having economic purport of assets (investment
of residents in other economies) and direct
investment in national economy, having
economic character of obligations to non-
residents (investment of non-residents in the
economy).
Payments by foreigners to acquire fixed capital assets in our country take a
plus (+) sign
Payments to foreigners to acquire fixed capital assets in their countries take

10. a minus (-) sign
Portfolio Investment
Payments used to purchase financial assets (securities).
Payments by foreigners to acquire securities (like bonds or corporate
stock) in our country take a plus (+) sign
Payments to foreigners to acquire securities in their countries take a
minus (-) sign
• Portfolio investment- This category includes
investment in corporate securities including
shares, sum of which (stockholding) accounts
not less than 10% and state debt securities
• Debt securities include bonds and bills of
exchange with duration not more than 1 year,
instruments of money-market and financial
derivatives.
Borrowing and Lending
• It includes Ptrade (commercial loans),
governmental and private loans, currency and
deposits and other assets and liabilities,

11. including debit and credit indebtedness on
contracts for delivery of goods and services a
(interest payments go under factor services). This
will include both new loans and repayment of principal
associated with old loans.
Loans from foreigners to us require them to make a payment to
us, so they take a plus (+) sign. You can think of this as a
foreign bank buying an I.O.U. from a domestic resident. The
I.O.U. is a financial asset.
Also, if a foreigner repays the principal on an old loan we made to
them, that also requires a payment to us and takes a plus (+)
sign.
Loans made by us to foreigners require us to make a payment to
them, so they take a minus (-) sign. You can think of this as us
buying a foreigner’s I.O.U. The I.O.U. is a financial asset.
Also, if we repay the principal on an old loan a foreigner made to
us, that also requires a payment to a foreigner and takes a
minus (-) sign.
Changes in Reserves
Changes in Reserves
 Changes in the quantity of foreign assets held by the
Central Bank.
 What’s left over after we sum up the Current Account
and Capital Account should be the change in the
reserves held by the Central Bank.

12.  If all these activities bring in more foreign exchange
than they use, the balance should be accounted for by
additional foreign assets held by the central bank.
 We call these assets reserves, so total reserves rise.
 If all these activities use up more foreign exchange
than they bring in, the Central Bank has to fill the gap
by selling some of the foreign assets it owns, so total
reserves fall. So:
Current Account + Capital Account = Change in
Reserves
 Reserve assets is the component of balance of
payments, which is very important in analysing
external operations of a country
 International reserves consist of external assets of
country, operations of which are carried out by the
Central Bank
 They can be used to finance deficit of balance of
payments by interventions on exchange market in
order to regulate exchange rate and to maintain
stability of the national currency
 Reserve assets consist of monetary gold, SDR, reserve
positions with IMF, assets in foreign currency
(currency, deposits, securities) and other requirements

13. Balance of Payments Deficit and Surplus
In theory, the current account should balance
with the capital plus the financial accounts
The sum of the balance of payments statements
should be zero
The Current Account, Capital Account, and
Reserve Changes should sum to zero – they
should include all of the inflows and outflows of
foreign exchange
For example, when India buys more goods and
services than it sells (a current account deficit),
it must finance the difference by borrowing, or
by selling more capital assets than it buys (a
capital account surplus)
A country with a persistent current account
deficit is, therefore, effectively exchanging
capital assets for goods and services
Large trade deficits mean that the country is
borrowing from abroad
In the balance of payments, this appears as an
inflow of foreign capital
In reality, the accounts do not exactly offset
each other, because of statistical discrepancies,
accounting conventions, and exchange rate

14. movements that change the recorded value of
transactions