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Learning Objectives
To understand the fundamental principles of how countries measure international business activity, the balance of payments To examine the similarities of the current and capital accounts of the balance of payments To understand the critical differences between trade in merchandise and services and why international investment activity has recently been controversial in the United States To understand how countries with different government policies toward international trade and investments, or different levels of economic development, differ in their balance of payments
Introduction
BOP is a systematic and comprehensive record of all economic transaction between one country and rest of the world during a period of one year.
Components of BOP
1) Current Account
2) Capital Account
3) Official Reserve Account 4) Error and Omission Account
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If the value of the country's merchandise exports is greater then the value of its merchandise imports the country is said to have trade surplus and if the value of merchandise exports is less than value of imports the country is said to have deficit trade balance.
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2.
This account includes all payments related to the purchase and sale of assets and to borrowing and lending activities.
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Summary
Current account deficit reflects a shortage of saving over investment; current account surplus reflects an excess of saving over investment. Current account deficits either run down net foreign wealth or run up foreign debts. Any current account deficit must be matched by an equal capital account surplus, and vice versa.
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