Describe components of Balance of Payment Account.

The various items which make up country’s Balance of Payments Account are listed in a simplified consolidated form in the above table. They are explained as under:
1.    Export and import of goods (Merchandise). The most straight forward way in which a country can acquire foreign currency is by exporting goods. These are called visible items because goods can be seen, touched and measured. This is shown by row (1) which indicates that the country has exported goods to a value of र 550 crores. In an analogous (similar) way, row (5) shows that the country has imported goods to a value of र 800 crores. These two rows describe the country's visible trade. Movement of goods between countries is known as visible trade because the movement is open and can be verified by custom officials at custom barriers.

2.    Services rendered and received. It includes both (a) non-factor income like income from shipping, banking, insurance, tourism, software services, and (b) factor income (investment income) like interest, dividends, profits on assets abroad. It should be noted that interest, dividends and profits, which citizens of a country earn on investment abroad are investment income and treated as factor income. Citizens of the country own land, bonds, shares, etc. abroad for which the foreigners who enjoy the services of this capital will have to pay for them. These payments will be registered under row (2) exports of services or invisible exports.
In a completely analogous way, row (6) covers payments which residents of the country in question make to foreigners for similar services. All these items describe country's invisible trade.
Balance of Invisibles. The balance of imports and export of services is called balance of invisibles since services are not seen to cross national borders. The invisible account includes (i) services like insurance, banking etc. (ii) investment income like rent, dividend and (iii) unilateral transfers like gifts, donations.

3.    Unilateral transfers. (Gifts, remittances, donations, indemnities, etc. from foreigners). The items in row (3) are called unrequited receipts because residents of a country receive ‘for free’. Nothing has to be paid in return at present or future for these receipts. These are like transfer payments. It includes both private and government transfers. Examples of this head are gifts received by residents from foreigners, remittances sent by emigrants (like Indians in Gulf Countries) to relatives, war indemnities paid by a defeated country, etc.
Note: In India unrequited or unilateral transfers are treated as a part of invisible trade.
Remember, sum total of the above-mentioned three components (merchandise, services and transfers) is called BOP on current account whereas the following 4th component comprises BOP on capital account.

4. Capital receipts and payments. (Borrowings, investment, capital repayments, sale of assets, changes in foreign exchange reserves). It records international transactions which affect the assets and liabilities of domestic country with ROW. Items (4) and (8) of the table given above, indicate changes in stock magnitudes and refer to capital receipts and payments. Government of a country may borrow (get loan) from another government; a firm may issue stocks abroad or a bank may float a loan in a foreign country. In all these instances, the country in question will acquire foreign currency and these transactions will be entered as credit items in row (4). Similarly, foreigners may acquire assets in the country with whose balance of payments they are concerned. Assets may be in the form of land, houses, plants, shares, etc. Changes in stock of gold or reserves of foreign currency are also included in Row (4). Analogously, if residents of the country in their turn were to acquire similar foreign assets, this would give rise to outflow of foreign currency and come as a capital transfer recorded as debit item in row (8).

Balance of Trade. It is the difference between the money value of exports and imports of material goods (called visible items) during a year. Clearly, the two transactions which determine BOT are exports of goods and import of goods (visible items). Examples of visible items are clothes, shoes, machines etc. The difference between the values of exports and imports of goods is called balance of trade or trade balance. Exports are considered as income and imports as an expenditure. It includes exchange of only visible items and does not consider exchange of services (i.e., invisible trade). Alternatively, balance of visible items is called balance of trade.
Surplus or deficit BOT. Balance of trade may be in surplus or in deficit or in equilibrium. If value of exports of visible items is more than the value of imports of visible items, balance of trade shows a surplus. Then BOT is also called positive or favourable. In case value of exports is less than the value of imports, the balance of trade is said to be negative or adverse or unfavourable, Thus, the balance of trade is called in deficit. In case value of exports equals its imports, the balance of trade is said to be balanced or in equilibrium. Remember when balance of trade is in deficit, it is offset with the help of capital account. 

Capital Account. The capital account of BOP records all such transactions which relate to purchase and sale of foreign assets and foreign liabilities during a year. It shows all the inflows and outflows of capital. It represents international flow of loans and investments which cause a change in country's foreign assets and liabilities. Capital account flows consist of foreign investments, foreign loans, commercial borrowings, banking capital, etc.
Components of capital account. Main forms of capital account transactions are given below:
(i)    Foreign investment. This refers to investment to and from Rest of World. Investment may be direct or portfolio. Direct investment means purchasing an asset and acquiring control of the same e.g. purchase of a house abroad. As against it portfolio investment means acquisition of asset that does not give control over asset, e.g. purchase of a bond issued by a foreign government.
(ii)    Foreign loans. These refer to credit granted by foreign governments and international institutions like IMF. External commercial borrowing are also included.
(iii)    Banking capital and other capital. Banking capital includes inflow and outflow of banking capital (non-residints deposits) excluding the central bank.
(iv)    Monetary movements or changes in foreign exchange reserve. This reserve keeps on changing depending upon the net balance of other private and official transactions.
The following extract from RBI's quarterly bulletin clearly shows the components of capital account of Balance of Payment.

Source: Reserve Bank of India bulletin, May 2011.

Mind, the sum of current account and capital account should be zero. A deficit (or surplus) on current account is always matched by an equal surplus (or deficit) in capital account. 

The current account of BOP account is that account which records imports and exports of goods, services and unilateral transfers during a year. It relates to all activities which do not alter the value of assets and liabilities of a country. Current account deals with real and short term transactions. These are called actual transactions as they affect income, output and employment of a country through transfer of goods and services. Thus balance of current account can be estimated as the sum total of balance of trade, balance of services and balance of unilateral transfers.
Components of current account of BOP. These items are as under:
(i)    Export and import of goods (called visible trade),
(ii)   Export and import of services – non-factor and factor services (called invisible trade),
(iii)  Unilateral transfers (Transfer receipts/payments) and
(iv)  Investment income (factor income from land, bonds, shares abroad).
The following extract from RBI's quarterly bulletin further clarifies the components of current account of Balance of Payment. The item ‘Merchandise’ used in the table means goods and their exports recorded as credits and imports as debits.

Source: Reserve Bank of India bulletin, May 2011.

Comparison between BOT and BOP. Briefly BOT is the difference between money value of imports and exports of material goods only whereas BOP is the difference between a country's receipts and payments in foreign exchange. Balance of payments is a wider concept as compared to balance of trade because BOT is just one of the four components of the former. BOT includes only export and import of goods whereas BOP includes (i) export and import of goods (ii) export/import of services (iii) unilateral receipts/payments and (iv) capital receipts/payments. Therefore, BOP represents wider and comprehensive picture of a country's economic transactions with the rest of the world than the Balance of Trade. Both are compared below.