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Question

(a) What do you mean by BOP? What are its two accounts?

(b) What are the characteristics of BOP?


Solution

(a) Balance of payment account is defined as a systematic record of all the transactions that take place between residents of a country and residents of other countries over a given time period. Its two components are: 

1. Current account: This relates to all the activities that do not alter the assets and liabilities of a country. It is the record of all the transactions for goods, services and unilateral transfers. 

Following are the items of the current account :
(i) Balance of trade account or visible items 
(ii) Balance of invisible accounts 
(iii) Unilateral transfers etc.

2. Capital Account: It records the international transactions which affect the assets and liabilities of the domestic country. 
Following are the items of capital account: 
(i) Private transactions 
(ii) Official transactions 
(iii) Foreign direct investment etc. 
(b) Following are the characteristics of BOP:


1. Systematic record: It is a systematic record of payment and receipts of a country relating to the economic transactions with other countries.

2. Fixed period of time: It is recorded for a fixed period of time, i.e., generally one year. 

3. Double entry system: Transactions are recorded on the basis of double entry system according to which it always gets balanced.

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