Balance Of Payment ~ ecoiq4u

Balance of payment (BOP)

We very often hear Balance of payment from economist and financial experts, In this article, we will discuss what is BOP and all other related phenomena such as the balance of trade, trade surplus, trade deficit, and current account deficit.

The balance of payment is a record of the economic transactions between the resident and the non-resident of the country for a specific time period.

Let's assume Elon Musk invests 100 million dollars in a German automaker VW whose CEO is Mr. Herbert Diess. As Elon is not a resident of Germany the receiver country will record the transaction in BOP, From the USA perspective the recipient country MR Herbert Diess is also not a resident of the USA so the USA also has to maintain this transaction under BOP.

While keeping the transaction of BOP the incoming money comes under the credit side and the outgoing money comes under the debit side.

The BOP is maintained by the central bank of the country and expressed in the US dollar.

All the countries of the world maintain BOP under similar formate prescribed By IMF. (International Monetary fund).To avoid confusion while calculating BOP of all the nations.

The net BOP of all the countries of the world is zero, as the credit of one country becomes the debit of other countries.

Why it's important to maintain BOP for a country

BOP of a country reveals its financial and economic status.
BOP statement can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.
BOP statement helps the Government to decide on fiscal and trade policies.
It provides important information to analyze and understand the economic dealings of a country with other countries.

For better understanding, we have to look at what are the elements of BOP and how its calculated

Current account Capital account

l l

Visible l Non visible Investment l Loan l Bank

l l

Goods Service l Income l Transactions

(Elements of BOP calculation)

BALANCE OF PAYMENT= CURRENT ACCOUNT +CAPITAL ACCOUNT +BALANCING ITEM

Balancing items are the date which are not disclosed later during the calculation of BOP.

There are broadly two sections of BOP one is the Current account and another is Capital account. The current account is further divided into visible and invisible parts.

Under Visible section comes all the tangible assets like goods and machinery.

Under the invisible segment, we record all the transactions related to services, Income, and other monetary transactions.

Services (IT services, Consultancy, insurance, etc)

Income(Profit, Interest, and Dividend(in the above example if the Elon musk receive profit from his invested money it will come under this segment)

and other intangibles.

Transaction (Remettiance, money sent by residents of one country to another.)

Current account deficit

The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.

Balance of trade

Balance of trade (BOT) is the difference between the value of a country's imports and exports for a given period and is the largest component of a country's.(BOP).

Balance of trade = Import - Export
if the result comes in positive its called the country is in trade surplus and if it's negative the country is in the trade deficit.

Countries having the highest Current account deficit-

Rank	Country	CAB (million US dollars)	Year
1	United States	-466,200	2017 EST.
2	United Kingdom	-106,700	2019 Q3 Only ^[2]
3	India	-57,200	2018-19 EST.^[3]
4	Canada	-49,260	2017 EST.

(According to Wikipedia)

The imports of these countries surpassed the export that is why the current account balance is negative. In countries like India, the import of petroleum product contribute hugely to the current account deficit. In the ideal situation, the current account balance of a country should be positive.

If the current account balance of a country is negative ie in deficit, the balance of trade of that country must be in deficit. In an ideal situation, the countries should aim at trade surplus ie,( the value of imports should be high as compare to import).

Capital Account

While calculating BOP countries also include the capital account. The capital account includes Investment, loans, and banking capital. (In the above examples the investment of Elon Musk would come under this section)

investment (investment in the form of FDI or FPI)

Loan (Loan in the form of a sovereign or corporate loan, loan by world bank)

Bank (The money deposited by residents of one country in another country)