Balance of Payment (BOP)

Balance of Payment (BOP) - Concept & Definition Most of exports and imports involve finance i.e. receipts and payments in money. An account of all receipts and payments is termed as Balance of Payments (BOP). According to Kindle berger, !"e balance of payments of a country is a systematic record of all economic transactions bet#een t"e residents of t"e reporting country and residents of foreign countries during a given period of time . !"e balance of payment record is maintained in a standard double$entry boo%$%eeping met"od. &nternational transactions enter in to t"e record as credit or debit. !"e payments received from foreign countries enter as credit and payments made to ot"er countries as debit. Balance of Payment is a record pertaining to a period of time' usually it is all annual statement. All t"e transactions entering t"e balance of payments can be grouped under t"ree broad accounts' (() )urrent Account, (*) )apital Account, and (+) Official &nternational ,eserve Account. -o#ever, it can be vertically divided into many categories as per t"e re.uirement. Structure of Balance of Payment (BOP) 1. Trade Account Balance &t is t"e difference bet#een exports and imports of goods, usually referred as visible or tangible items. !ill recently goods dominated international trade. !rade account balance tells as #"et"er a country en/oys a surplus or deficit on t"at account. An industrial country #it" its industrial products comprising consumer and capital goods al#ays "ad an advantageous position. 0eveloping countries #it" its export of primary goods "ad most of t"e time suffered from a deficit in t"eir balance of payments. Most of t"e OP1) countries are in better position on trade account balance. !"e Balance of !rade is also referred as t"e 2Balance of 3isible !rade2 or 2Balance of Merc"andise !rade2. . Current Account Balance &t is difference bet#een t"e receipts and payments on account of current account #"ic" includes trade balance. !"e current account includes export of services, interests, profits, dividends and unilateral receipts from abroad, and t"e import of services, interests, profits, dividends and unilateral Payments to abroad. !"ere can be eit"er surplus or deficit in current account. !"e deficit #ill ta%e place #"en t"e debits are more t"an credits or #"en payments are more t"an receipts and t"e current account surplus #ill ta%e place #"en t"e credits are more t"an debits. !. Capital Account Balance &t is difference bet#een t"e receipts and payments on account of capital account. !"e capital account involves inflo#s and outflo#s relating to investments, s"ort tern borro#ings4lending, and medium term to long term borro#ing4lending. !"ere can be surplus or deficit in capital account. !"e surplus #ill ta%e place #"en t"e credits are more t"an debits and t"e deficit #ill ta%e place #"en t"e debits are more t"an credits. ". #orei$n %&c'an$e (e)er*e) 5oreign exc"ange reserves ()"ec% item 6o.7 in above figure) s"o#s t"e reserves #"ic" are "eld in t"e form of foreign currencies usually in "ard currencies li%e dollar, pound etc., gold and 8pecial 0ra#ing ,ig"ts (80,s). 5oreign exc"ange reserves are analogous to an individual2s "olding of cas". !"ey increase #"en t"e individual "as a surplus in "is transactions and decrease #"en "e "as a deficit. 9"en a country en/oys a net surplus bot" in current account : capital account, it increases foreign exc"ange reserves. 9"enever current account deficit exceeds t"e inflo# in capital account, foreign exc"ange from t"e reserve accounts is used to meet t"e deficit &f a country2s foreign exc"ange reserves rise, t"at transaction is s"o#n as minus in t"at country2s balance of payments accounts because money is been transferred to t"e foreign exc"ange reserves. 5oreign exc"ange reserves (forex) are used to meet t"e deficit in t"e balance of payments. !"e entry is in t"e receipt side as #e receive t"e forex for t"e particular year by reducing t"e balance from t"e reserves. 9"en surplus is transferred to t"e foreign exc"ange reserve, it is s"o#n as minus in t"at particular year2s balance of payment

account. !"e minus sign ($) indicates an increase in forex and plus sign (;) s"o#s t"e borro#ing of foreign exc"ange from t"e forex account to meet t"e deficit. +. %rror) and Omi))ion !"e errors may be due to statistical discrepancies : omission may be due to certain transactions may not be recorded. 5or eg< A remittance by an &ndian #or%ing abroad to &ndia may not yet recorded, or a payment of dividend abroad by an M6) operating in &ndia may not yet recorded or so on. !"e errors and omissions amount e.uals to t"e amount necessary to balance bot" t"e sides.