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Components of balance of payment

BOP is divided into two accounts.

Current account

It records transactions relating to exchange of goods and services and unilateral payments. Unilateral payments refer to all those types of un-required payments for which nothing will be received in return. For example, charity, donations, gifts, etc. Current transactions bring about a change in the current level of a country’s national income. Current Account includes
  • Merchandise or visible trade: This includes export and import of goods only. Imports of goods are debited and exports of goods are credited.
  • Invisibles: It is classified as follows:
    • Services: It includes foreign travel, transportation and insurance premium.
    • …Investment income: It includes income received from the ownership of foreign financial assets and income paid to non-residents.
    • …Government: It consists of funds received from foreign governments and institutions and similar payments made by India.
    • …Miscellaneous: It includes all residual transactions of the current account such as royalties, management fees, subscription to journals, consultancy, etc.
    • …Transfer payments: It refers to all those types of unrequited payments for which nothing will be received in return. For example, charity, donations, gifts, etc.

Capital account

It records transactions representing foreign financial assets and liabilities. Capital transactions bring about a change in the capital stock of a country. It includes:
  • Private capital: It includes only residents’ capital transactions for both short term and/or long term. Short term capital includes loans and repayment with their original maturity of one year or less. Long term capital includes direct investment in shares, real estate, bonds, etc.
  • Banking capital: It includes central bank receipts of repurchases from IMF and foreign financial assets and liabilities of the government
  • Official capital: These are of 4 kinds:
  • …Loans: It includes credit granted by foreign governments and international institutions to central and state governments.
  • …Amortisation of capital: Amortisation of capital is purchase and resale of securities sold to foreigners.
  • …Miscellaneous errors and omissions: It includes understatement or overstatement of receipts and payments.
  • …Gold and foreign exchange: These are required for stabilizing the foreign exchange rate of the home currency.
The net balance of capital account will depict a country’s overall BOP position.

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