Balance of Payment

The Balance of Payment (BoP) is a comprehensive, systematic record of economic transactions of the residents of a country with the rest of the world during a given period of time usually one year.

A consistently positive BoP reflects more foreign investment and money coming into the country and not much of its currency being exported. On the other hand, adverse negative BoP indicates more outflows of money compared to inflows. Here, each transaction is undertaken by residents of a country results in a debit and credit of equal size. In the BoP sheet currency inflows are recorded as credits (+), whereas, outflows are recorded as debits (-).

Characteristics of Balance of Payment:

  • It is a way of listing receipts and payments in international transactions of a country.
  • It adopts a double-entry bookkeeping system. It has two sides, i.e. debit and credit. Payments are recorded on the debit side and receipts on the credit side.
  • In the accounting sense, debit or credit will always balance each other.
  • It consists of two sets of accounts, i.e. Current account and the Capital account.
  • Real and short-term transactions are recorded under the current account. The capital account records all financial and long-term transactions.

Components of Balance of Payment:

Current Account: The balance of payment on the current account includes the value of imports and exports of both visible items (goods) and invisible items (services).
Capital Goods: It refers to financial transactions. it mainly includes foreign investment and external loans. All kinds of short-term and long-term international capital transfers, movement of gold, foreign debts, foreign investment, grants all are included in the capital account.
Official Reserve Account/Financial Account: It comprises the purchase and sale of official reserve assets by the central bank. The central bank uses the foreign reserve as a cushion against National Economic misfortune. These reserves comprise foreign financial assets, T bills etc. These are the transactions of finance overall balance. Earlier gold was treated as an international reserve, now it comprises FOREX, SDR, gold and reserve position in IMF.
Statistical Discrepancy/Error and Ommission: It arises because of various reasons such as unrecorded or misread transactions, electronic transactions, using different methods of calculating various items such as dividend and income. Thus, these errors are visible when the debit and credit of BoP do not match.

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