What is the Full Form of BOP in Economics?

BOP Full Form: BOP is an abbreviation for Balance of Payment. It is a declaration that documents all monetary transactions that have occurred between the citizens of a country and the rest of the globe during a specified time period.

The balance of payment shows all transactions conducted by a country’s corporations and government institutions with companies, government institutions, and businesses based outside of the country. The balance of payments includes both imports and exports of goods, capital, and services, as well as transfer payments. 

Components of BOP

The balance of payments is made up of three major components. The current account, capital account, and financial account are the names given to these three components. Total current accounts, capital accounts, and financial accounts must be balanced. 

The components of the current account and capital account are given below

Current Account

• Visible Trade
• Invisible Trade
• Income receipts and payments 
• Unilateral transfers to and from abroad

Capital Account

• Investments to and from abroad 
• Changes in foreign exchange reserves 
• Loans to and borrowings from abroad

Significance of BOP

A country’s balance of payments is critical for the following reasons:

• A country’s Balance of Payments expresses both its financial and economic situation. 
• The Balance of Payments Statement assists the government in making fiscal and trade policy decisions. 
• The balance of payments provides critical information for understanding a country’s economic exchanges with another country. 
• The balance of payments can be used to identify whether the country’s currency is appreciating or depreciating. 

Formula of BOP

The following is the formula for calculating the balance of payments:

BOP= current account + capital account + financial account + balancing item

BOP vs Balance of Trade

The balance of trade merely considers the difference between items exported and imported, whereas the BOP considers the real flow of foreign exchange. Foreign currency movement can be caused by a variety of variables. It includes the export and import of goods. So, if someone wants to focus solely on the import and export of products, they should consider the trade balance.

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