Cnnpren 34

Balance of Payments
Balance of Payments: Meaning
sense that it
the goods
countries
from
other
imports
produces all the goods and services it needs. Every country
high
cost as
produced
at
an
unduly
only
&at cannot be produced at all in the country or can be
the
commodities
to
other
countries
compared to the foreiglr supplies. Similarly, a country exports
which those countries prefer to buy from abroad rather than produce at home.

In the modem world, there is hardly any country which is self-sufficient in the

"The balance of payments is a systematic record of economic transactions of the residents of a

country with the rest of the world during a given period of time." The record is so prepared as to
provide meaning and measure to the various.cornponents of a country's external economic transactions. Thus, the aim is to present an account of all receipts and payments on account of goods
exported, services rendered and capital received by residents of a country, and goods imported,
services received and capital transferred by residents ofthe country. The main purpose ofkeeping
ftese rec.ords is to know the international economic position of the country and to help the Govemment in reaching decisions on monetary and fiscal policies on the one hand, and trade and payments
questions on the other.

Balance of Tfade and Balance of Payments

Balance of tade and balance of payments are two related terms but they should be carefully
distinguished from each other because they do not have exactly the same meanin g. Balance of trade
refers to the dffirence in value of imports and exports of commodities only, i.e., visible items only.
Movement of goods between countries is known as visible trade because the movement is open dnd
can be verified by the custom offrcials.

During a given period of time, the exports and inports may be exactly equal, in which case, the
balance of payments of tade is said to be balanced. But this is not necessary for those who export
and import are not necessarily the same persons. If the value of exports exceeds the value of imports,
the country is said to experierrce anexport surplus or a favourable balance oftrade. Ifthe value ofits

imports exceeds the value of its exports, the country is said to have a defi.cit or an adverse balance
of trade.
The terms "fovourable" and "unfavourable" are derived from the mercantilist writers of the
lSth century. In tliose days, settlements of the foreign transactions were made in gold. If India had
exported Rs. 100 crores worth of goods but had imported Rs. 80 crores worth of goods, India would
receive Rs. 20 crores worth of gold from the foreign countries. As gold was regarded as wealth and
as the receipts of gold made a country wealthy, the mercantilist writers regarded exports surplus as
being favourable to the country.
goods, but imported Rs. 150
On the other hand, if India had exported Rs. 100 croies worth
"f
crores worth of goods, it had to pay Rs. 50 crores in gold to the foreigners. India would be losing
gold and would be poorer to that extent. Th-erefore, an import surplus was regarded by the mercantilist writers as adverse balance. But in these days. the international tansactions are not settled in
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