Portfolio investment

This is money that flows across national boundaries for the purpose of investing in shares and bonds. Example. If someone in the UK buys some shares in an American company, this will count as an outflow of money from the UK (-) in the portfolio investment section of the capital account. If an American buys some shares in a British company, this will count as an inflow of money into the UK (+) in the same section

Again, note that the earnings from these shares and bonds (dividends and interest) will appear, in subsequent years, in the investment income section of the current account. For as long as the UK citizen holds onto the American shares, he will receive an annual dividend, which will represent an inflow of money into the UK (+) on the investment income section of the current account.

Other investment

This section can be quite hectic because it includes short-term 'hot money' banking flows. It also includes net government borrowing from foreigners.

Net errors and omissions

The double entry book - keeping principle states that for every credit, there is a corresponding debit and therefore, there should be a balance in BOP as well. In reality BOP may not balance, due to errors and omissions. Errors may be due to statistical discrepancies (differences) and omissions may be due to certain transactions may not get recorded.

5. Foreign Exchange Reserves

The balance of foreign exchange reserve is the combined effect of current and capital account balances. The reserves will increase when:-

a) The surplus capital account is much more than the deficit in current account.

b) The surplus in current account is much more than deficit in capital account.

c) Both the current account and capital account shows a surplus.

Date: 2014-12-28; view: 1112