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- The Balance of Payments (BoP) is a book which records all the monetary transactions in goods, services, and capital that take place between residents of a country and the rest of the world.
- It is a flow concept which means that it is calculated over a period of time. In India, RBI releases the BoP data on a quarterly basis.
Who is considered as ‘Normal Resident’ of a country?
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- Normal resident of a country refers to the one who ordinally resides in the country and whose centre of economic interest also lies in that country.
- They include both, individuals and institutions like firms.
Centre of economic interest means:
1. The resident lives within the domestic territory of any country.
2. The resident carries out basic economic activities of earnings, spending and accumulation of wealth the domestic territory of that country.
3. Residing in the country for more than 182 days in a financial year. (Note: There are other criteria also to define residency of an entity but from the perspective of understanding the basic concept of residency, this criterion of 182 days is very important)
Note: A resident of any country may or may not be the citizen of that country. Thus, residency is an economic concept whereas, citizenship is a political concept.
There are mainly three types of transactions which are reflected in Balance of Payment account:
1. Transaction in Goods: They are also known as visible or merchandise account transactions.
2. Transaction in Services: The are also known as Invisibles account transactions.
3. Transactions in Capital: They reflect the changes in assets or liability in terms of change in foreign ownership of capital.
Components of Balance of Payment
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