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Components of Balance of Payments

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Identify and define three components of a country's balance of payments?

Discuss the historical process of trade barrier reduction.

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Solution Summary

This solution discusses the three components of balance of payments. It also traces the historical process of trade barrier reduction.

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The Balance of Payments

According to Fieleke (1996), "the balance-of-payments accounts are commonly grouped into Three major categories: (1)accounts dealing with goods, services, and income; (2)accounts recording gifts, or unilateral transfers; and (3)accounts dealing basically with financial claims (such as bank deposits and stocks and bonds)".

1. The Current Account

The current account records the flow of goods and services into the economy.

Investopedia (n.d.) describes the current accounts as "credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights. When combined, goods and services together make up a country's balance of trade (BOT). The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports".

OECD (2001) refers to the current account "as those that includes all the transactions (other than those in financial items) that involve economic values and occur between resident and non- residents entities".

The current accounts are classified as goods and services, current transfers, and income.

2. The Capital Account

The capital account is a ...

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