“Balance of Payments”

What Do You Mean By Balance of Payment (BoP)?

Balance of Payment (BoP) is a record of a country’s transactions with the rest of the world, over a certain period of time. It is used to measure a country’s economic standing. Every nation has to report what money they are receiving and what payments they are making to other countries in the form of the balance of payments.

The most comprehensive form of BoP incorporates the current account, capital account and financial account transactions. The current account captures all econoymically significant international flows of goods, services, incomes and transfers. The capital account captures all international capital movements such as foreign direct investments and portfolio investments. The financial account captures all international transactions between residents and non-resdients.

The sum of all these transactions is referred to as the balance of payments. A positive balance of payments means money is flowing into the country from the rest of the world, and a negative balance of payment means money is flowing out of the country.

Components of Balance of Payment (BoP)

The balance of payments can be broken down into two components – the current account and the capital account. The current account captures all economically significant international flows of goods, services, incomes and transfers. This includes imports and exports of goods and services, balance in trade, foreign direct investment inflows and outflows, and remittances.

The capital account captures all international capital movements such as foreign direct investments and portfolio investments. These are investments made by foreign individuals and entities in the target country. This is important as they are key drivers of economic expansion, technological modernization and socio-economic development.

FAQ

How is the balance of payments calculated and measured?

The balance of payments is calculated by summing the current and capital account transactions and adjusting for statistical errors and omissions. It is then reported in statistical form and expressed in a unified currency, usually the US dollar.

What is called BoP?

BoP stands for Balance of Payments. It is a record of a nation’s transactions with the rest of the world over a certain period of time. These transactions include imports and exports of goods and services, foreign direct investments, and remittances.

Also See: Cost Overrun