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Balance of Payments Accounts

Balance of Payments Accounts

The balance of payments is a combined account of receipts and payments to and from other nations that arise from economic activities annually. According to C.B Kindleberger, “the balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting and the residents of the foreign countries during a given period of time.” It includes payments from individuals, firms, and the government. Besides, it includes economic transactions from visible and invisible items, i.e., services of shipping, banking, insurance, etc.

Components of Balance of Payments

The balance of payments consists of three broad groups:

  • current account;
  • financial account; and
  • capital account.

Current Account

The current account captures the inflow and outflow of goods and services. It also includes public and private gains on investments. Moreover, current accounts deal with credit and debit on merchandise trade, including raw materials and manufactured goods, and services such as transport and consultation fees.

The combination of these goods and services creates the balance of trade (BOT). The BOT is a major part of the balance of payments since it totals exports and imports. When a country has a trade deficit, it imports more than it exports and vice versa.

Generally, the current account is decomposed into four sub-accounts, namely:

  1. the merchandise trade: this includes all commodities and manufactured goods bought, sold, or given away;
  2. services: these include fees for transportation, tourism, engineering, consultation, etc;
  3. income receipt: this includes the income derived from the ownership of assets, such as income for foreign investments and dividends and interest payments; and
  4. unilateral transfer: unilateral transfers refer to earnings sent by individuals who are based abroad to their respective countries. It also includes foreign aid provided by other countries.

Capital Account

The capital account includes recordings of international capital transfers. It refers to the acquisition or disposal of non-financial and non-produced assets required for production. The capital account is broken down into two sub-accounts.

The two sub-accounts included in the capital account are  discussed below.

  1. Capital transfers include monetary flows that emanate from debt forgiveness, transfer of goods and financial assets when leaving or getting into a country.
  2. Sales and purchase of non-produced, non-financed assets such as the sale and purchase of intangible assets such as copyrights, leases, and trademarks.

Financial Account

The financial account is sub-divided into:

  1. financial assets abroad: these are further divided into official reserve assets, government reserve, and private assets. Examples of these assets are gold and foreign currencies; and
  2. foreign-owned assets: similarly, these are divided into official and other foreign assets. Examples of these assets are direct investments and securities issued by the reporting country’s government and private sectors.

Question

Where would you most likely record patent fees and legal services?

  1. Capital account.
  2. Current account.
  3. Financial account.

Solution

The correct answer is B.

Patent fees and legal services will be recorded in the current account because they are measures of the flow of goods and services.

On the other hand, the purchase of copyrights or trademarks would be included in the capital account.

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