Two main categories in the balance of payments are the balance account and the capital account.

The balance account summarizes a country’s real transactions involving currently produced goods and services. These transactions are grouped in the following categories:

-Merchandise trade account

-Services account

-Income receipts and payments on asset accounts

-Unilateral transfers account

The merchandise trade account measures the trade deficit or surplus. Its balance is derived by subtracting merchandise imports from merchandise exports. A negative result indicates a balance of trade deficit; a positive result – a balance of trade surplus.

The services account measures the following transactions: travel and transportation, tourism, fees and royalties.

Income receipts and payments on asset accounts measure foreign investment in the country and foreign investment abroad.

Unilateral transfers are payments made to a country for which no goods or services are received. An example is a foreign aid to a country devastated by an earthquake or flood.

On the whole, the current account of balance is the sum of the exports and the imports of goods, income and net unilateral transfers.

The capital account measures transactions that involve existing rather than currently produced assets. There are two major categories in the capital account: the country’s assets and foreign official reserved assets and the country’s other assets and other foreign assets. Official reserve assets are transactions involving central banks, that is, the official government institutions that establish monetary policy. The country’s other assets and foreign assets refer to direct investments as well as investments in government treasury bills and stocks of private companies.

Comprehension:

1. What does a balance account show?

2. What categories are the country’s transactions grouped in?

3. In what account is the trade deficit or surplus shown?

4. What does the services account measure?

5. What is an example of unilateral transfers?

6. Give the difference between the capital account and the balance account.

7. How many categories are there in the capital account?

Summarizing.