The balance of payments, or BOP, is a country’s record of all transactions between two nations. It is kind of like your register that shows all the inflows and outflows of your money! It measures how much money is going in and out of a country.
These transactions include payments for services and the country’s exports and imports of goods, financial capital, and financial transfers. The current and financial accounts often referred to as the capital accounts, constitute a country’s balance of payments. Much like your online bank account or checkbook gives you a snapshot of your financial situation, these accounts help tell a story about the state of an economy and its outlook.
Structure of Balance of Payments
As mentioned above, the balance of payments is generally divided into the current and financial accounts.
The current account measures the short-term inflows and outflows of money into a country, usually within a year. This includes exports and imports of services and merchandise. More exports help create a trade or account surplus; more imports generate a deficit. It is also termed Current Account Surplus or Deficit.
The capital or financial account is the second key component in the balance of payments. The financial account is where long-term flows of payments are recorded between countries. This includes payments for physical capital, such as factories and equipment, and financial capital, such as stocks, bonds, and real estate. Individuals, businesses, and even governments can make these payments or purchases.
Impact of Balance of Payment
Suppose the balance of trade is in deficit. In that case, this means that imports exceed exports, which would eventually have to be corrected, as foreign trading partners will not indefinitely finance the deficit (e.g., through investment in the deficit country). One way to adjust is for the deficit country’s currency to fall in value or, through government intervention, to be ‘devalued.’
If the domestic currency falls in value, imports become more expensive, and exports become relatively cheaper. This automatic mechanism should bring the balance of trade back into line. However, in reality, economic systems seldom work this efficiently, and even advanced countries like US and UK have maintained trade deficits for several years.
Balance of payments statistics could be unreliable, mainly based on estimates. However, there would always be a number known as the balancing item in the balance of financial accounts, which ensures that the balance of payments (current account plus capital account) balances overall.
Conclusion: How to Use Balance Of Payment & How It Affects Economy Growth
In recent years, the balance of payment has been a hot topic in the economy. This is because the global balance of the payments is constantly changing, sometimes even harmful. In some countries, such as China, the balance of payment is positive, and in others, like India, it is negative. This imbalance affects the economy and foreign exchange rates.
We should not think about these issues only from an economy and investment point of view. We should also think about how this imbalance affects us as individuals – how will we fare if we do not get our daily needs fulfilled? It may be a good idea to put these concerns into action and start making changes in our life to improve our financial situation.