Current Account and Capital Account
Balance of Payments (BOP): Overview
Introduction: Balance of Payments (BOP) is a comprehensive statement of a country's economic and financial transactions with the rest of the world over a specific period, typically one year. It encompasses all financial outflows and inflows, representing payments and receipts. A BOP deficit occurs when financial outflows exceed inflows, while a surplus occurs when inflows are greater.
Types of Transactions:
- Current Account:
- Encompasses trade in goods and services, including the balance of trade.
- Current account transactions involve day-to-day economic activities.
- Capital Account:
- Deals with investment and borrowings.
- Includes various financial transactions like Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), External Commercial Borrowings (ECBs), Masala Bonds, and more.
Components of Current Account:
- Merchandise Trade:
- Foreign trade in physical goods, covering exports and imports.
- Invisible Trade:
- Encompasses various services and intangible transactions.
- Examples include software services, knowledge process outsourcing, consulting services, shipping services, tourism, and royalty on patents.
- Remittances:
- Transfer of money by foreign workers to individuals in their home country.
- Notable examples include Non-Resident Indians (NRIs) sending money to India.
- Factor Payments:
- Incomes derived from wage, interest, profit, or rent.
Components of Capital Account:
- Involves financial transactions related to investments and borrowings.
- Includes Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), External Commercial Borrowings (ECBs), Masala Bonds, and other forms of capital flows.
Significance: Balance of Payments is a crucial indicator of a country's economic health and its interactions with the global economy. A surplus or deficit in the BOP reflects the overall financial position and trends in international trade and finance.
In summary, BOP provides insights into a country's economic relationships with the rest of the world, covering a broad spectrum of transactions ranging from trade in goods and services to various forms of financial investments and borrowings.
