Balance Of Payments (BOP) Despite its name, the “balance of payments” data is not concerned with actual payments made and received by an economy, but rather with transactions. Since many international transactions included in the balance of payments do not involve the payment of money, this figure may differ significantly from net payments made to foreign entities over a period of time. Does the “balance of payments” actually balance? In theory, a current account deficit would have to be financed by a net inflow in the capital and financial account, while a current account surplus should correspond to an outflow in the capital and financial account for a net figure of zero. In actual practice, however, the fact that data are compiled from multiple sources gives rise to some degree of measurement error. Balance of payments and international investment position data are critical in formulating national and international economic policy. Certain aspects of the balance of payments data, such as payment imbalances and foreign direct investment, are key issues that a nation’s economic policies .
Does the “balance of payments” actually balance? In theory, a current account deficit would have to be financed by a net inflow in the capital and financial account, while a current account surplus should correspond to an outflow in the capital and financial account for a net figure of zero. In actual practice, however, the fact that data are compiled from multiple sources gives rise to some degree of measurement error.
A financial account is a component of a country’s balance of payments that covers claims on or liabilities to nonresidents, specifically with regard to financial assets. Financial account components include direct investment, portfolio investment and reserve assets and are broken down by sector. When recorded in a country’s balance of payments, claims made by nonresidents on the financial assets of residents are considered liabilities, while claims made against nonresidents by residents are considered assets.
Economic policies are often targeted at specific objectives that, in turn, impact the balance of payments. For example, a country may adopt policies specifically designed to attract foreign investment in a particular sector. Another nation may attempt to keep its currency at an artificially depressed level to stimulate exports and build up its currency reserves. The impact of these policies is ultimately captured in the balance of payments data.
Economists use the basic balance to help determine long-term trends in a country's balance of payments. The measure is less sensitive to short-run fluctuations in the interest or exchange rates, providing insight for the long term. The basic balance incorporates international investment fluctuations from the capital account, making it more responsive to long-term changes in a nation's productivity.
Financial Account' Providing a tracking mechanism for shifts in international asset ownership, the financial account consists of two subaccounts. The first is concerned with the domestic ownership of foreign assets, such as foreign bank deposits and securities in foreign companies, and the second is concerned with the foreign ownership of domestic assets, such as the purchase of government bonds by foreign entities or loans provided to domestic banks by foreign institutions.
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