Balance of Payments(BoP)

 We know that countries exchange their products or services with other countries. Do you know how this data or record of transaction is maintained? This is  maintained with the help of  'Balance of Payments'.

Let's take a glance over it.(This is just an overview of BoP).

What is the BoP?

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Balance of Payments(BoP) is defined as "An accounting statement which provides information of every economic transactions made between residents of one country with the rest of the world in a systematic form in a given period of time".  BoP is such a statement which gives record of transactions made between countries (doesn't matter whether the nation has given or taken something). The Economic transactions being discussed here include transfer of ownership of goods and services,money and assets. Means there is a transaction of visible items(products), invisible items (services), unilateral transfers (any one way transfer or say gift) and Capital Asset transfers(say FDI). It works on double entry system (entry system with both credit and debit side). 

Now Balance of Payments is of three types ;Surplus ,Balanced and Deficit. 

1.Surplus BoP-  When credit side exceeds the debit side(Cr>Dr). Means this is the situation arises when the country exports more than it imports. It is beneficial for boosting the economic growth of a country.

2.Balanced or Equilibrium BoP- When the credit side is equal to the debit side(Cr=Dr).

This is the situation arises when the country imports and exports goods,services and capital in equal ratio. 

3.Deficit BoP- When credit side is less than the debit side(Cr<Dr). This is the situation arises when the country imports more goods,services, and capital than it exports.

The Balance of payments should be zero. Means the Assets and Liabilities should be balanced.

Features of BoP

1.Fixed time- This statement of accounting is only for a fixed period of time(usually one year or quarter). 

2.Double entry system- Transactions are noted on the basis of this system (both receiving and giving; Credit &Debit) 

3.Items- It includes both government as well as non government items.

4.Systematic record- It is a systematic record of all givens and takens(payments and receipts) of a country with the rest of the world. 

Importance of Balance of Payments

1. It shows true picture of financial situation of a country.

2. Allows the government to work on policies after proper review of it. 

3. It indicates any kind of appreciation or depreciation in the value of country's currency. 

4. Provides assistance in regulating export and import.

5. It monitors every International transaction.

Division of Balance of Payments 

Balance of Payments is actually categorised into 3 groups ;The Current account, The Capital account,and The Financial account.

Let's understand them one by one in short.

1.Current account- It includes services like Business Services, Engineering Services, tourism receipts, etc. It also includes imports and Exports of goods, services and unilateral transfer during a specific period of time. In short inflow and outflow of goods and services into a country are recorded in this account.

2. Capital account- Remaining economic transactions i.e Capital Asset transfers are documented in this account. Also International capital transfers are noted down in this account.

3. Financial account- In this account bonds, investments in businesses, flow of fund pertaining to the investment,venture,real estate,stocks, assets owned by government such as gold Special Drawing Rights(SDR),Foreign reserves,etc. are documented. 

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