Introduction to balance of payments (BOP)
The balance of payments is a statement of all transactions conducted between entities in one country and the rest of the world across a defined period, such as a quarter or a year.
Understanding The Balance of Payments
The balance of payments (BOP), known as the balance of international payments, summarises all transactions that a country's individuals, corporations, and government bodies complete with individuals, companies, and government bodies outside of the country. These transactions comprise imports and exports of goods, services, capital, and transfer payments, like foreign aid and remittances.
A country's balance of payments, as well as its net international investment position together, create its international accounts.
Types Of Balance Of Payment
The balance of payment is classified into three types:
Current account: This account scans the incoming and outgoing goods and services between countries. All the payments performed for raw materials and constructed goods are covered under this account.
Capital account: Capital transactions like the purchase and sale of assets (non-financial) like lands and properties are monitored under this account. The finance governs the shortage or excess in the current account from the capital account and vice versa.
Finance account: The funds that move to and from other countries by investments like real estate, foreign direct investments, business enterprises, etc., will be recorded in this account. This account determines the foreign proprietor of domestic assets as well as the domestic proprietor of foreign assets and analyses if it is earning or selling more assets like stocks, gold, equity, etc.
Importance Of Balance Of Payment
The importance of the balance of payment (BOP) can be determined from the following points:
It monitors the transaction of all the exports and imports of goods and services for a given period.
It helps the government analyse a particular industry export growth potential and formulate policy to sustain that growth.
It gives the government a comprehensive perspective on a different range of import and export tariffs. The government then increases and decreases the tax to discourage import and encourage export, individually, and be self-sufficient.
If the economy drives support in the mode of import, the government plans, according to the BOP, and redirect the cash flow and technology to the unfavourable sector of the economy and seek future growth.
The balance of payment also intimates the government to detect the state of the economy and plan expansion.
