The balance of payment (BOP) is a statement that documents all transactions from one nation to another between entities, government agencies, and people during a specific time period. The statement includes all transaction information, giving the authorities a clear picture of the money movement. After all, the fund's intake and outflow should be equal if the items are listed on the statement. The balance of payment for a country reveals whether it has a financial surplus or deficit. It indicates if a country's exports exceed its imports or vice versa.
Importance of Balance of Payment
A BOP is a crucial document or transaction in the finance department since it reveals a country's and economy's financial position. The following factors can be used to determine the relevance of BOP:
It analyses all of a country's products and service exports and imports during a specific time period.
It assists the government in determining the potential for a certain industry's export growth and developing policies to encourage such growth.
It provides the government with a comprehensive view of a variety of import and export levies. The government then takes steps to raise and lower taxes in order to discourage imports and boost exports, accordingly, and to achieve self-sufficiency.
If the economy needs import help, the government will plan according to the BOP, to divert cash flow and technology to the unfavorable sector of the economy in order to achieve future growth.
The government may also use the balance of payments to identify the status of the economy and plan expansion. The country's monetary and fiscal policies are based on its balance of payments situation.
Components of Balance of Payment
BOP has the following major components:
Current Account: This account tracks all products and services that enter and leave the country. This account is used to cover all payments for raw materials and finished items. Tourism, engineering, stocks, commercial services, transportation, and royalties from licenses and copyrights are among the various deliveries mentioned in this category. All of these factors come together to form a country's BOP.
Capital Account: This account tracks capital transactions such as the acquisition and selling of non-financial assets such as lands and properties. This account also tracks the flow of taxes, as well as the purchase and sale of fixed assets by immigrants relocating to a new nation. Finance from the capital account controls the current account deficiency or surplus, and vice versa.
Financial Account: This account records the monies that move to and from other nations through investments such as real estate, foreign direct investments, business companies, and so on. This account estimates the foreign owner of domestic assets and the domestic owner of foreign assets, as well as determining if it is buying or selling additional assets such as stocks, gold, or equity.