The balance of payments:
The balance of payments (BOP) constitutes all the transactions made by one country with the rest of the world during a certain period of time. It compares the amount of economic activity between a country and all other countries.
Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit.
The balance of payments is divided into three main accounts: •The current account, which evaluates the transactions related to trade in goods and services as well as income transfers and investment •The capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets •The financial account, which measures investment flows.
The current account:
The major account of the BOP is the current account, which lists the inflow and outflow of a country arising from transactions in goods and services of goods and services into a country as well as earnings on investments, both public and private with foreign countries.
The Current Account is composed of four sub-accounts:
Goods: includes all raw materials and manufactured goods bought, sold, or given away.
Services: includes transportation, tourism, insurance, banking, dividends or interest on foreign investment, royalties and other activities. If money is being paid for a service it is recorded like an import (a debit), and if money is received it is recorded like an export (credit).
Income: includes income derived from ownership of assets, such as dividends on holdings of stock and interest on securities.
Unilateral transfers: are transactions with nothing received in return. These include workers' remittances, donations, aids and grants, official assistance and pensions.
Here are the variables that go into the calculation of the current account balance (CAB):
X = Exports of...