Balance of Payments

The balance of payments, according to economists, is a record of all transactions. Over a given time period, transactions between entities in one country and the rest of the world. It records all transactions within and outside a country between individuals, corporations, and government agencies. The current account includes all product and service transactions, as well as investment income and current transfers. Financial instrument transactions and central bank reserves are included in the capital account. It only pertains to the trading of financial instruments. The current account is taken into consideration for calculating national production, while the capital account is not.

Official Reserve Transactions are transactions that are carried out by a country’s monetary authority to modify official reserves. These transactions take place in the exchange market for other assets and foreign currencies, such as the buying and selling of currency. When the economy is in deficit, these foreign currencies are sold in the exchange market, and when the economy is in surplus, they are purchased from there. Official reserve transactions are critical because they assist the country’s total balance of payments to be balanced. As a result, these transactions serve as accommodation items in the BOP.

A country’s official reserve is its gold reserves, special drawing privileges, and marketable foreign currency. The balance of payments surplus and deficit are defined as the rise and fall in the official reserve, respectively. Capital Account, Current Account, and Financial Account are the three parts/categories of the Balance of Payments. A country’s foreign exchange reserves grow when its total BOP is in surplus. Reserves are drawn during deficits by selling foreign currencies on the exchange market, while foreign currencies are bought during surpluses.

This reflects the current account and capital account of central banks in the international balance of payments accounting. The current account tracks a country’s imports and exports of commodities, services, revenue, and transfers, as well as whether it is a net creditor or debtor. Foreign and domestic investments, government borrowing, and private sector borrowing are all recorded in the capital account. Reserve asset inflows or outflows put the ledger back into balance when there is either a balance of payments deficit or surplus. The official settlement account reflects this.