Explain the double-entry system of the balance of payments. What will

Explain the double-entry system of the balance of payments.

What will be an ideal response?

ANSWER

Answer: The balance of payments uses a double-entry system. Each transaction gives rise to two entries: One entry is a credit, and the other entry is a debit of equal value. Any transaction resulting in a payment to foreigners is entered in the BOP accounts as a debit. Any transaction resulting in a receipt of funds from foreigners is entered as a credit. In the double entry system, the flow of money from a domestic resident to a foreign resident is a credit and the item that gives rise to the flow (either an import of a good or service or the purchase of a foreign asset) is a debit.