Since the Balance of Payments statement was drawn up in the terms of debits and credits based on a system of double-entry bookkeeping, If all the entries are made correctly, total debits must equal total credit.
This is because of two aspects (debit and credits) of each transaction recorded are equal in amount but appear on the opposite sides of the BOP account.
In this accounting sense, the balance of payments of a country must always balance.
In other words, debits or payments side of balance of payments account of a country represent the total of all the uses made out of the total foreign exchange acquired by the country during a given period, While the credit or receipt side represents the sources from which this foreign exchange was acquired by this nation in the same period.
The balance of trade is a narrow concept, while the balance of payment is a wider concept. In fact, the balance of payments includes in its structure is the nation of the balance of trade.
The two sides as such area necessary balance.
Equilibrium & Disequilibrium in Balance of Payments
In short, are a balance of payments may be thought of as a balance scale with every addition on one side necessity and addition of others to keep it in equilibrium.
Thus, There can be no disequilibrium in the balance of payments as a whole.
However, while a nation’s International accounts must always balance its accounts need to be in equilibrium.
Say- if a country’s Balance of payments was a Debit balance in Merchandise and service accounts (on current account side), it’s a credit balance in other accounts (on the capital account side) must be sufficiently large so that total debits equal total credits.
That is to say, when a country has the Debit balance on the current account, It is either importing capital on a long or short term or it is exporting Gold, or it is receiving donations from foreigners and thereby its credit in the current account is extended to the extent of debt in the current account.
In a functional Sense, Thus, There may be disequilibrium in the balance of payments of a country.
Operationally, a country at a time may be receiving more payments from abroad than what it has to make.
Thus, when total receipts exceed total payments, there is a surplus balance of payments, it is regarded as “ A Favourable Balance,” Sometimes a country has to make more payments abroad then what it receives.
Then, there is a deficit in its balance of payments, it is regarded as an “Unfavorable balance”.
Hence, the unusual analytical approach to the balance of payments is to consider it as the difference between receipts from payments to foreigners by the residents of a country.
Symbolically thus, the balance of payments may be defined as:
B = R – P
- B stands for the balance of payments
- R stands for receipt from foreigners, and
- P stands for payments made to foreigners
Clearly, thus, when B is zero, the balance of payments can be regarded as an Equilibrium Balance of Payments.
That is to say, a country’s balance of payments may be said to be in equilibrium when its receipts are equal to its payment on account of its transactions with other countries of the world.
Such a country with equilibrium Balance of payments is often called a country in “External Balance”.\
However, a country’s BOP is said to be ‘Favourable’ or in ‘Surplus’ When the total receipts from the rest of the world exceed the total payments to the rest of the world.
Symbolically, When the B is positive, it is called a Favourable balance of payments. On the other hand, if the country’s receipts from foreigners fall short of its payments to foreigners, its balance of payments is said to be “Unfavourable” or “Adverse BOP”.
A country whose balance of payments is and the surplus is often referred to as a “Surplus” country.
Similarly, when its the balance of payments, is in “Deficit” or “Adverse”, it is called a “Deficit” country.
Briefly, thus, the phenomenon of disequilibrium (deficit or surplus) in the balance of payments is viewed from the balance of transactions on the current account as such.
A disequilibrium, surplus or deficit in this sense shows strengthening or weakening of a country’s external capital position which is measured by the balance of its External Assets to liabilities.
Now You know Equilibrium & Disequilibrium in Balance of Payments.