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Balance of Payment

Last updated date: 26th Nov 2023
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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.

FAQs on Balance of Payment

1. What do you mean by the balance of payment?

A country's balance of payments is a systematic record of all economic transactions between its people and residents of other nations during a specific time period.

2. What are the components of the current account of Balance of Payment?

Balance of payment has the following components:

  • Goods export and import (visible items)

  • Service export and import (invisible items)

  •  Transfers to and from other countries on an ad hoc basis.

3. What are the problems with the Balance of Payment?

Balance of payments problems can emerge gradually over time as a result of events such as the loss of key export markets, increased import dependency, declining capital inflows, rising foreign debt, unsustainable current account deficits, sustained currency overvaluation, and banking sector weaknesses. These problems can become severe if foreign loans become unavailable and international reserves plummet to the point that they can no longer deal with import and export volatility or decreases in net capital inflow.

4. What is the difference between BOT and BOP?

BOT is a declaration that documents a country's imports and exports of products to other nations during a specific time period. BOP, on the other hand, keeps track of all of a country's economic interactions across time.

5. What is the importance of the balance of payment?

A BOP account is significant for an economy since it is a major signal for a government to set its standards on monetary and fiscal policies, inflation management, and so on. With the study resources supplied by Vedantu online, students may obtain a more in-depth understanding of the Balance of Payment. For better exam preparation, look into the various study materials and online classes now.

6. What are the Components of the Capital Account of the Balance of Payments?

  1. Borrowings and lendings inflow and outflow.

  2. Investments flow.

  3. Changes in foreign exchange reserves.

7. What are the Transactions of the Current Account of Balance of Payment?

  1.   Exports and imports of services.

  2.  Income receipts and payments to and from abroad.

  3.  Transfers to and from abroad.

8. When the Price of Foreign Currency Increases, its Demand Falls. Explain Why.

When the price of the foreign currency increases the import cost also increase. This leads to a decreased demand for imports. Resulting in the demand for foreign exchange to fall.