Balance Of Payments Flashcards, test questions and answers

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What is Balance Of Payments?

The Balance of Payments (BOP) is an accounting system used to track a country’s international transactions, including exports and imports of goods and services, investments, gifts, foreign aid, remittances, government transfers and other financial flows. BOP measures all money that enters or leaves a country over a given period of time. It is an important indicator for assessing a nation’s economy as it affects currency exchange rates and international trade. A country with a positive balance of payments means that it has more money coming in than it has going out; conversely, a negative balance indicates that there is less money coming in than going out.One of the most important components of the BOP is exports and imports. Exports are goods or services sent from one country to another while imports are goods or services received from another country. When exports exceed imports the resulting surplus increases foreign reserves while imports exceeding exports results in a deficit which reduces foreign reserves. When these surpluses occur they can have positive implications on both countries increased capital available for investment can lead to economic growth while deficits can put downward pressure on their respective currencies which can benefit exporters by making their products cheaper abroad but raises import prices domestically which could reduce domestic consumption due to higher costs.The second component of the BOP is investments: direct investment involves buying assets such as debt or equity while portfolio investment involves buying financial instruments such as stocks or bonds without taking control over any part of the company whose securities were bought; both types increase capital inflows into countries where investments are made but also allow companies to expand internationally if they choose to invest elsewhere. Other factors that influence BOP include government transfers (such as aid), remittances (money sent back home by citizens working abroad) and foreign direct investments made by multinational corporations investing in different countries around the world; all these flows represent either inflows (when money comes into the country) or outflows (when money goes out). A nation’s overall balance depends on how much capital flows in compared with how much flows out; if inflows exceed outflows then it will have a positive balance which typically leads to appreciation of its currency relative to others therefore making its products more expensive abroad but cheaper at home this helps promote domestic economic growth at the expense of its trading partners who tend to suffer losses when faced with this scenario due to lower profits from exporting their own products overseas.