financial influx is treated as a credit to the Balance Of Payments. A BOP is the term used to denote the cash balance of a country and does not refer to the balance sheet . The BOP is always maintained in tune with the rest of the world. The BOP must equilibrate except for abnormal circumstances like the bankruptcy of a country. Precisely the BOP must be ‘zero’ denoting that equal amount of inflow and outflow has taken place.
Divisions in BOP
The BOP is usually split up in three parts. They are:
The Capital and Financial Account
The Current Account
The Official Reserve Account
The Capital and Financial Account also referred to as the KA encompasses all the long-term and short-term dealings. It also includes omissions and net errors. Moreover, the financial account deals in all the transactions involving shifts in ownerships of foreign financial assets and liabilities of a particular economy. Whatever transaction is carried on by the Central Bank goes to the official reserve account (OR). These transactions for instance the Federal Bank selling currencies and earning foreign exchange is treated as a credit to the BOP. Ideally the BOP has to be zero and to maintain this there is another item called Statistical Discrepancy (SD). The SD reflects bad transactions that have been omitted. This arises in case of inaccurate recording of transactions.
Therefore the overall Balance of Payment acts to be a good indicator of the pressure that goes into the valuation that is appreciation or depreciation of the currency.