Balance of Payments

Balance of Payments
A record of international transactions between residents of one country and the rest of the world

Objective
Its main objective is to represent the economic position of a country, whether its currency is rising or falling in its external value.

Characterstics of Balance of Payments

It is statement having two sides. It is a record of economic transaction. It shows a relation between receipts & payments. Visible & Invisible items both are included in this statement. It is prepared for a certain period of time.

Structure of balance of payments accounts

The balance of payments account of a country is based on the principle of double-entry bookkeeping. Each transaction is entered on the credit and debit side of statement. But balance of payments accounting differ from business accounting in one respect. In business accounting, debit(-) are shown on the left side

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and credits (+) on the right side of statement . But in the balance of payments accounting, debits are shown on the right side and credits on the left side of the statement. For example: When a payment is received from a foreign country, it is a credit transaction while payment to a foreign country is a debit transaction.

Components of Balance of payments

Current Account Capital Account Official Account Current Account- The current account of a country consists of all transactions related to trade in goods and services and unilateral transfers.

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Capital Account- The capital account of a country consist of its transaction in financial assets in the form of short-term and long-term lending and borrowing.

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Official Settlement Account In fact it is a part of capital account. But in UK and USA balance of payments accounts shows as a separate account. It measures the change in nations liquid and non liquid liabilities to foreign official holders and the change in nations official reserve assets.

BOP Surplus and Deficit

What is BOP Surplus ? What is BOP Deficit ?

Ways Of Measuring of Deficit or Surplus

Basic balance Net liquidity balance Official settlement balance.

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Basic balance- which includes the current account balance and long-term capital account balance Net-liquidity balance- which includes basic balance and short-term non liquid balance, allocation of SDRs. Official settlement account-It includes total net liquid balance and short term liquid balance.