All about Business and management

July 26, 2007

Balance of payments accounting system (BOP)

Filed under: International Business — Jagdish Hiray @ 7:48 pm

            Balance of payments accounting system (BOP) is an accounting system design to track buy and sell transactions between countries by an individuals, businesses and government agencies. It is double entry system in which each transaction creates a credit entry and a debit entry of equal value. Buying goods and services creates debit entries and selling things produces credits entries.

             BOP reocords only those trasactions that has some monetary value. It records transactions done in certain period of time, say for a year. It records transactions between residents of one country and residents of other countries. Residents can be individuals, businesses or government agencies. A branch of a firm is considered as resident of parent country since it is not incorporated in host country. Whereas a subsidiary is incorporated in host country and considered as resident of host country.

             Conceptually BOP system consists of four major accounts: current account, capital account, official reserv acount and errors and omissions. The current account records four types of transactions: exports and imports of merchandise, exports and imports of services, investment income and gift, between residents of different countries. Capital account records capital transactions such as purchaes and sales of assets. Capital account includes foreign direct investment (FDI) and portforlio investment. Official reserves account records official reserves held by a national government. It includes assets such as gold, SDRs, convertible currencies and reserve positions at IMF. The errors and omissions acount is used to adjust BOP balance such that sum of all four account type approximates to zero. 

            BOP helps to understand the performance of each country’s economy in international market. It helps business people identify emerging markets, understand market competitiveness and helps policy maker to define new policies accourding to market trend. It also helps policy maker to watch and act as feedback system for their newly implemented policies. It also gives exporters and importers good knowledge about internaltional market transactions and trend to plan their business better. It also reflects country’ export and import potential and in turn helps business analysts to monitor international market. 



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