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Balance of Payments

The other significant indicator in international trade is the balance of payments. Summarize your understanding of micro- and macroeconomic theory in a discussion of the balance of payments and its effects on national and global economic systems.

How do the balance of trade and the balance of payments affect one another? Together how do they affect global commerce?

How do they impact the domestic economies of nations?

How do they affect individual business decisions?

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Meaning of Balance of payments

BALANCE OF PAYMENT MAY BE DEFINED AS SYSTEMATIC RECORD OF ALL ECONOMIC TRANSACTIONS BETWEEN A RESIDENT OF THE COUNTRY AND THE REST OF THE WORLD DURING THE GIVEN PERIOD. Thus the Balance of Payments 'BOP' is an account of all transactions between one country and all other countries--transactions that are measured in terms of receipts and payments. From the U.S. perspective, a receipt represents any dollars flowing into the country or any transaction that require the exchange of foreign currency into dollars. A payment represents dollars flowing out of the country or any transaction that requires the conversion of dollars into some other currency. The three main components of the Balance of Payments are:

1. The Current Account including Merchandise (Exports Imports), Investment income (rents, profits, interest)
2. The Capital Account measuring Foreign investment in the U.S. and U.S.investment abroad, and
3. The Balancing Account allowing for changes in official reserve assets (SDR's, Gold, other payments)
How do the balance of trade and the balance of payments affect one another? Together how do ...

Solution Summary

This discusses the concept Balance of Payments

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