7 (a) Explain the current and financial accounts in the balance of payments. Balance of Payment or also called as BOP is a statistical statement that systematically records of all economic transactions between one country and the rest of the world during a given period of time. For example, BOP shows the details of the total payments made by a country and also the total receipts by it. There are three major components that are summarized in the BOP which are Current account, Capital account and also Official Reserve account. Actually there is also Financial account in the BOP which is total up together with the Capital account. However, these two items bring two different rolls in the BOP. Here, there will be some explanation about Current and Financial accounts in the Balance of Payment. Current account is the first section in the BOP. It contains receipts and payments on goods and services. The current account has four components which are merchandise trade balance, service balance, net income and current transfers. Merchandise trade balance is the difference between export and import of physical goods. It covers general merchandise, goods for processing, repairs on goods, goods procured in ports by carriers and nonmonetary good. Thus, it also referred to as visible goods. The formula for merchandise trade balance is as follows:
If the value of a country’s merchandise exports are greater than the merchandise imports, it is said that a trade surplus has occurred (exports > imports) but if the value of a country’s merchandise exports are less than the merchandise imports, it is said that a trade deficit has occurred (exports < imports). Service balance is the difference between receipts and payments from services. It covers transportation including freight, travel service, communication services, education services and many more. This includes the services given to the foreigner. The formula for service balance is as follows:
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