Balance of Payments (BOP)
Balance of payment refers to a systematic record of all economic transactions between the residents of one country and the residents of foreign countries during a particular period of time. For example, one year.
It contains a classified record of all receipts and payments arising from goods exported, services rendered and capital received by residents in a country and payment made by them on account of goods imported, services rendered and capital transferred to non residents or foreigners out of the country.
Balance of payment is the principal tool for analyzing the monetary position of international trade of a country just like Receipts and Payments account of enterprise revealing the net effect of cash movements happening in an enterprise during a particular period.
Balance of payments help in framing monetary, fiscal and trade policies of country. Government keenly observes balance of payment position of its important trade partners in making policy decisions. It reveals whether a country produces enough economic output to pay for its growth. It is reported either for every quarter or for a year.
A Balance of Payment surplus indicates that country’s exports are more than its imports and its government and residents are savers. They are in position to have enough capital to pay for its domestic production. The country can even lend to other countries which in turn buy its products. As a result it boosts the economic growth in the short term. The country achieves higher economic growth due to higher exports in the long run. It builds strong domestic market. This protects the economy from exchange rate fluctuations.
A Balance of Payment deficit points to the fact that country’s import is more than the export. This situations forces the country to borrow from other countries to pay for its imports. It creates economic development in the short term. It is just similar to taking an educational loan from bank to pay school fees of children expecting their salary in the future which would help repay the loan.
According to International Monetary Fund, “ The balance of payments for given period is a systematic records of all economic transactions taken place during the period between residents of the reporting countries.”
In the words of Domini Salvatore
“The Balance of payment is a summary statement in which principle all the records of the resident of a nation with the resident of all other nations are recorded during a particular period of time, usually a calendar year.”
The main features of balance of payments are as follows.
1. It is a systematic record of all economic transactions between one country and certain other countries of the world
2. It is prepared for a period of three months or twelve months, i.e., usually 12 months
3. It contains all receipts and payments both visible and invisible
4. It includes all economic transactions both recorded on current account and capital account
5. Economic transactions are recorded according to double entry principle of book keeping. Accordingly receipts are recorded on credit side and payments are recorded on debit side
6. It indicates a country’s position in foreign trade
7. BOP shows a favourable or surplus position when the total receipts from foreign countries exceed the total payments to foreign countries. When the receipts from foreign countries are less than the payments to foreign countries, BOP is said to be unfavorable or in deficit
8. BOP position shows the economic health of nation just like the thermometer indicates the temperature of human body. Favourable BOP indicates economic prosperity while unfavourable balance of payments shows economic weakness of a country.