Balance of Payments

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Balance of Payments and International Trade

The Balance of Payments or BoP is a country's official settlement balance, otherwise known as the balance of official financing. BoP is defined by:

• The BoP is the measure of a country's total international trade.
• It counts all of the trade that is accomplished in goods and services and in money.
• The payments or proceeds into a country are entered as positive numbers and the deficits or payments out of the country are entered as negative numbers.

The term balance applies because the trade of goods and services in one direction will be balanced by the transfer of money in the opposite direction. More accurately, the trade of these goods and services as they are measured by the current account will be balanced by the transfer of money as it is measured by the capital account.

The Foreign Exchange Market

In relation to the foreign exchange market, which keeps account of the values of the major currencies of the world, the balance of payment has the potential to influence the prices of free-floating currencies. That is because free-floating currencies are effected not only by political events or government policies but also by the economic events represented by the BoP and even by the speculation of individual traders.