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Precious metals investment terms A to Z

Balance Of Payments

The Balance Of Payments is a government produced financial measure relating to a period of time which accounts in financial terms for the difference between the value of all the country’s imports and its exports. It is an important measure of a country’s relative performance in the global economy.

Eric asks:

Eric, the Beginner

Eric, the Beginner

Hi John, do you know how the balance of payments (BOP) are calculated?
John, the Trader

John, the Trader

Yes, I’ll explain it to you. In essence, the BOP is the difference between the value of a country’s imports and its exports. If the country exports more than it imports, this will result to a surplus (the country builds foreign reserves). If the country imports more than it exports, this will result to a deficit (the country runs down its foreign currency and has to borrow abroad).
Eric, the Beginner

Eric, the Beginner

What is the significance of calculating BOP?
Read the whole discussion

There are two major sections to the calculation of the balance of payments figure, the current account and the capital account.

The current account is further divided into the trade in goods and the trade in services. The trade in manufactured goods includes imports and exports of energy products, raw materials and components, manufactured goods and foodstuffs. The trade in services is comprised of intangible items such as banking, finance shipping etc. The current account balance is made up of the balance from the trade in goods and services as well as any income on the country’s foreign investments. This foreign income includes dividends and interest payments paid to and from other countries, as well as government transfers through aid or contributions to international bodies. It is called the current account as it reflects the transactions concluded in the period and which do not give rise to future claims on the country’s wealth.

The Capital Account records the net changes in the ownership of foreign assets. It includes the Reserve Account which includes the international operations of the country’s central bank, along with all loans and investments between the country and the rest of the world. So the Balance Of Payments = the current account – the capital account +/- the balancing figure.

The Balancing Figure is an amount which accounts for any statistical variances and ensures that the capital and current accounts balance to zero. When the Reserve Account is excluded the Balance Of Payments can be either in surplus (country is building foreign reserves) or in deficit (the central bank is running down foreign currency balances or borrowing money from abroad).

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