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Definition

The balance of payments (BOP)

The measurement of all international economic transactions between the residents of a country and foreign residents is called the balance of payments (BOP).

Home-country and host-country BOP data are important to business managers, investors, consumers, and government officials because the data influence and are influenced by other key macroeconomic variables such as gross domestic product, employment, price levels, exchange rates, and interest rates. Monetary and fiscal policy must take the BOP into account at the national level. Business managers and investors need BOP data to anticipate changes in host country economic policies that might be driven by BOP events. BOP data might be important for any of the following reasons:

        • The BOP is an important indicator of pressure on a country’s foreign exchange rate and thus on the potential for a firm trading with or investing in                 that country to experience foreign exchange gains or losses. Changes in the BOP may predict the imposition or removal of foreign controls.

        • Changes in a country’s BOP may signal the imposition or removal of controls over payment of dividends and interest, license fees, royalty fees, or                 other cash disbursements to firms or investors.

        • The BOP helps to forecast a country’s market potential especially in the short run. A country experiencing a serious trade deficit is not as likely to                 expand imports as it would if it were running a surplus. It may, however, welcome investments that increase its exports.

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