The Balance of Payments

The Balance Of Payments

Balance of payments is a record of a country’s trade in goods, services, and financial assets with the rest of the world.

Balance of payments is a record of the total receipts and payments between one country and another during a year.

It is finance balance in and out a country within a year.  Balance of payments can be divided to 3 main accounts; namely current account, capital account and overall account.

A.                 The Current Account

Current account is the record of a country’s imports and exports of goods and services, plus incomes and transfers of money to and from abroad.

Current account can divide by two; visible trade and invisible trade

 i.                        Visible Trade

This includes the value of imports and exports. In visible trade, it’s only taking the value of imports and exports goods. For services, it does not include in the visible trade but it’s including in invisible trade account.

 

                                                       ii.            Invisible Trade

This includes the value of imports and exports services. The services can divide for more components. In the visible trade have 3 main components like services account, income account and nets transfer.

Services account

·                     All services transaction either it accepting from overseas or service which gave to foreigners.

·                     Example; travelling, transportation, post office and others.

 

Income account

·                     These consist of wages, interest and profits flowing into and out of the country. For example, dividends earned by a foreigners. (Debit item).

 

Nets transfers

·                     These include government contribution to and receipts, international transfer of money by private individuals or firms.

 

Format for currents account

CURRENTS ACCOUNT	RM Millions
a.             Visible trade +     Export -           Import =     balance of trade	--------------- --------------- ---------------
b.            Invisible trade +        Services account +        Income account +        Nets transfers =      Invisible balance	-------------- -------------- -------------- ---------------
c.             Balance on Current Account =      a  +  b	----------------

B.                 Capital Account

The capital account records all transactions between a domestic and foreign resident that involves a change of ownership of an asset.

It is the net result of public and private international investment flowing in and out of a country. This includes foreign direct investment, portfolio investment (such as changes in holdings of stocks and bonds) and other investments (such as changes in holdings in loans, bank accounts, and currencies).

 

Formats to calculate BOP

BALANCE OF ACCOUNT	RM Millions
A.      Current Account               i.            Visible trade +     Export -           Import =     balance of trade             ii.            Invisible trade a.        Services account +               Transportation +               Travel +               Government Services +               Others Services = Balance of Services Account b.       Income account +         Investment income +         Dividend/ interest +         Wages/ salary = Balance of Income Account c.        Nets transfers =      Invisible balance (a + b + c ) =      Balance of Current Account         (visible trade + invisible trade)	……………….. ……………….. ……………….. ……………… ……………… ……………… ……………… ……………… ……………… ……………… ……………… ……………… ……………… ……………… ………………
B.       Capital Account +         Direct investment +         Portfolio investment +         Long term investment +         Private capital +         Others investment/ capital = Balance of Capital Account	……………… …………….. ……………… ……………… …………….. ……………… ………………
C.       Net Transfers	----------------
Balance of Payment [ A + B + C ]	----------------