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A transaction is generally referred to as the exchange of an asset for another or an asset for many other assets. International transactions are listed in the balance of payments on a double entry basis as in business accounting. This principle enables each transaction to yield two offsetting entries with values equal so that the debit and credit entries balance each other. Transactions are valued according to the market prices and are recorded in occurrence of a change of ownership. Changes of ownership on goods, services, and unilateral transfers make up the current account, transactions in financial assets and liabilities constituting the capital account.
According to International Monetary Fund in its strife for international comparability, balance of payment refers to “ a statistical statement for a given period showing (1) transactions in goods, services, and income between an economy and the rest of the world, (2) changes of ownership and other changes in that economy’s monetary gold, special drawing rights, (SDR’s), and claims on and liabilities to the rest of the world, and (3) unrequited transfers and counterpart entries that are needed to balance, in the accounting sense, any entries for the foregoing transactions and changes which are not mutually offsetting.”
In United States, balance of payments is prepared by the Bureau of Economic Analysis (BEA) and the U.S. Department of commerce on quarterly basis. In this view, an economy is considered to be composed of economic entities with a closer degree of association to given territory than with the other. In U.S. balance of payments, the economy is made of over 50 states. Balance of payments according to the principle of double-entry of business accounting provides for every increase in an asset to be offset by decreases in other assets or increases in liabilities. As such, an increase in an
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In order to measure export and import activity of each country, economists apply Balance of Payments (BOP). The goal of this paper is to give a brief understanding of what is the balance of payments and balance of payments deficit and to analyze what are the consequences of reducing a balance of payments deficit.
According to the BPM transactions, for the most part between residents and nonresidents, “consist of those involving goods, services, and income, those involving financial claims on, and liabilities to, the rest of the world; and those (such as gifts) classified as transfers which involve offsetting entries to balance – in an accounting sense – one-sided transaction” (International Monetary Fund, 1).
A country’s balance of payments consists of various accounts like the current account which is arrived at by summing up the total values of trade in goods and services, the incomes from investments and the transfers (Nikolas 2010, p. 57). The capital or financial accounts which is arrived at by summing up the values of capital or financial flows, portfolio investments and the net investments.
For the case of Greece crisis of 2009 the European Union had to adjust its monetary policy. The measures had been taken to ensure a balance of payment was balanced. The Greece government had to carry out the reforms needed in conjunction with European monetary union to keep its balance of payment at an equilibrium point.
Another essential element that can be an indicator of a country's economic health is their exchange rates. Exchange rates compare the currency of one country to that of another. There are many ways in which the exchange rates can affect an economy. Understanding how exchange rates and balance of payments are linked is important to understanding how a country's economy interacts with that of other countries around the world.
Balance of payments comprises of the balances in the current and capital accounts. The relationship between exchange rate and balance of payments structure is that they correspond with one another. When an exchange rate of a country’s currency reduces against currencies of
This has therefore seen the economy of Qatar register a relative deficit in their balance of payment within the period of 1997-2007.
CIA World Factbook (2013) report shows that between the years 1997 and 2007, the income balance
mmodating items for instance, use of special drawing rights, borrowing from the IMF and drawing from the reserves held by the Central Bank of foreign currencies are not included (McConnell & Brue, 2013). Excluding these accommodating items yields neither surplus nor deficit in
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