The balance of payments is a comprehensive and systematic record of all economic transactions, between the residents of a country and the rest of the world.
The balance of payments is merely a way of listing receipts and payments in international transactions for a country.
The Balance of payments(BOP) country is a record of all ‘Economic Transactions’ between the residents of the country and the residents of other countries.
It presents an account of all receipts and payments of accounts of goods exported, services rendered and Capital received by residents/government of a country. And goods important services received and capital transferred by the residents or government of a country.
Format of Balance of Payment Account
The balance of payments manual describes the concept of follows:
The Balance of payments is a statistical statement.
Thus, The BOP transaction includes all foreign receipts and payments by the country during the given year.
The Balance of payments includes:
Trade balance and in addition the balance of The Invisible (services). The Invisible include the amount for shipping, banking, insurance, technical service, and tourism.
When a country exports items it generally receives “Foreign exchange” and when it imports it make payments in foreign exchange. The difference between exports and imports is the balance of trade which could result either in a “Surplus Position” or “Deficit Position”.
The invisible balance of trade is the difference between ‘invisible exports of services’(such as insurance, tourism, transport, etc.), and The Invisible imports of services.
The next item in the balance of trade account is the amount received from investors abroad and the interest paid for such investments, the difference between the two indicates the balance of interest account.
The total of these three viz.-
- The balance of Trade,
- The Invisible trade balance, and
- The balance on interest account.
Consolidates the Balance of payments on the current account.
Similarly, the difference between the long-term capital receipts and the long-term capital payments represents the balance of the long-term capital account.
The total of the balance of the short term and long term capital account represent the balance of payments on capital account.
The aggregate of the transactions on current account and capital account indicates the balance of payment positions, which in turn indicates whether the balance of payments position is favorable or otherwise, (I.e. surplus or deficit).
There is another item known as balancing item which equalizes the receipts and payments and makes the balance of payments balance.
Balancing item in effect is the official items for the financing of the surplus or deficit, which are in the form of external resources or transactions with IMF resulting in repayment/borrowing to the IMF.
The balance of payments (BOP) account is reflected in the following Table.
Hence, Balance of payment is the residue of all foreign receipts and payments and balance may be favorable and unfavorable.
The total of all exports is credited and the sum of all imports is debited.
Components of Balance of Payments Account
The balance of payment is listed in three components as per the proforma of Balance of payments Shown here below-
(1). Current Account
Private: Merchandise (or trade) Balance
Invisible: Travel (tourists) and transportation (shipping and related services)
Income on Investment: investment, royalties, interest, dividends, foreign Bond earnings.
Other services government: Military supplies, grants, etc.
(2). Capital account
Long-term: private and government
Short term: private
Errors and Omissions: Net
(3). Settlement Account
Gold and SDR Movement (out and in)
Importance of Balance of Payments (BOP)
The concept of balance of payments is wider in comparison to the concept of balance of trade.
The balance of payment(BOP) of a nation is a systematic record of economic transactions between the residents of a given country and the rest of the word, In a given period.
So, the concept of balance of payments is having more importance than the concept of balance of trade, which is listed in the following points.
1. International Balance
The international balance of payments, which is a quantitative summary of a centuries International Financial transactions over a period of time reveals various aspects of a country’s International Economic Position.
The international balance of payments of a country furnishes information about the international economic position of the nation.
It has been devised to describe in a concise fashion the state of the international economic relations of the nation, as a guide to its Monetary, Fiscal, Trade, exchange and other policies.
It offers a major control tool for both analyzing and directing a country’s international economic position.
Thus, the fundamental goal of the balance of payments statement is to inform governmental authorities about the international economic position of the nation assist them in reaching decisions on monetary and fiscal policies and foreign trade and foreign exchange Phenomena.
2. Economic Development
With the development of national income accounting, The balance of payments account has been used to measure the influence of foreign trade and transitions on the level of national income of the nation.
In the case of the underdeveloped country, The BOP shows the extent of dependence of the country’s economic development on the financial assistance given by the developed capital lending Nations and International Financial Institutions like IMF, IBRD, and IDA.
In the case of an old country, financially well-off, having far-flung foreign investments and receiving a large income flow in the form of dividend and interest income.
3. Economic Barometer of Nation
The most important significance of the study of a nation’s international balance of payments lies in its being an indicator of the changing international economic position of a country.
The Balance of payment is an economic barometer, which is properly handled by the economic analyst, can be used to appraise a nation’s short-term international economic prospects, to evaluate the degree of its International solvency and to determine the appropriate foreign exchange rate of the money unit of a nation.
4. Currency Valuation
The payment Balance of payments accounting also permits and appraisal of the effect of currency devaluation like with the experts have increased to a considerable extent through devaluation or not can be easily seen from the current account section of the balance of payments statement.
5. Analytics of Economy
The balance of payments analysis shows with a country is paying its way Internationally, whether it is paying for its imports and other current payments transactions by exporting goods, drawing down its foreign assets, accumulating foreign liabilities, or receiving, donations.
Thus, whether a nation is borrowing or lending money, whether its currency and foreign exchange resources are becoming weaker or stronger, and how effective are the monetary and exchange control policies.
It can be studied from the balance of payments statement of the country.
Thus, a country’s international balance of payments can provide us with some information vital to our understanding of that country’s economic dealings with other Nations. It shows us, For instance, the composition of these dealings, the flow of goods and services and changes, if any, in the country’s status as a debtor and creditor in relation to other Nations.
Thus, now you know the format and components of balance of payment account.