Balance Of Payments Definition

An accounting record of all transactions made by a country over a certain time period, comparing the amount of foreign currency taken in to the amount of domestic currency paid out.. Balance of payments may be used as an indicator of economic and political stability. A countrys balance of payments is commonly defined as the record of transactions between its residents and foreign residents over a specified period. Each transaction is recorded in accordance with the principles of double-entry bookkeeping, meaning that the amount involved is entered on each of the two sides of the balance-ofpayments accounts.. International transactions enter in to the record as credit or debit. The payments received from foreign countries enter as credit and payments made to other countries as debit. A systematic record of a nation's total

payments to foreign countries, including the price of imports and the outflow of capital and gold, along with the total receipts from abroad, including the price of exports and the inflow of capital and gold.

Introduction
The balance of payments (BoP) is a statistical statement that systematically summarizes, for a specific period (typically a year or quarter), the economic transactions of an economy with the rest of the world. It covers (a) all the goods, services, factor income and current transfers an economy receives from or provides to the rest of the world; and (b) capital transfers and changes in an economy's external financial claims and liabilitiesThe balance of payments
reports all financial flows of a country vis--vis the rest of the world. It is a farly complicated balance sheet but, in this short text, we shall present it in quite simplified way for the absolute beginner. An aggregate view In very aggregate terms, let's consider all "money" entering into a country (for whatever reason and transaction) and all "money" exiting from it.

The difference between the two is the change in the official currency reserves of the central bank. In other terms, people from abroad bring their currency to the central bank, obtaining the local currency in exchange. The local people buy foreign currency in the central bank. All these transactions can have intermediaries (as banks) but at the end, there is a place (the "reserves" of the central bank [1]) that accomodate for the differences between inflows and outflows. Since reserves are usually small in comparison with the flows - and their systematic decrease or increase create problems, as we shall see in a moment - to a large extent, inflows and outflows tend to be equal.

In fact, if outflows are larger than inflows, the reserves are going down, until the central bank reacts (e.g. by devaluating the currency). If outflows are smaller than inflows, reserves pile up. Since they could be profitably used, there is a pressure to reduce them (e.g. by stimulating an outflow in terms of outgoing FDI). In absence of tight currency control and central bank activities, the exchange rate tends to react with a spontaneous devaluation in the first case, and with a revaluation in the second one, helping reducing the unbalance

Components
The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and the residents of foreign countries during a given period of time. It is an important index, which reflects the true economic position of a country, whether the country is a creditor country or a debtor country, and whether its currency is rising or falling in its external value. There are various types of monetary transactions that take place between two countries: The export and import of a goods and services The international lending and borrowing Servicing of foreign debts and their final repayments.
Main Components of a Balance of payments Account

I. Current Account

(A) Goods

General merchandise, goods for processing, repairs on goods produced in ports by carries and non-monetary gold.

(B) Services

Transportation, travel, communications, construction, financial and computer services, royalties and license fees, other professional and business services.

(C) Income

Direct investment income, portfolio investment income, and compensation of employees

(D) Current Transfers

Government current transfers, workers' remittances and other current transfers.

II. Capital and Financial Account

1. Capital Account
(A) Capital transfers Government and private transfers of fixed assets and forgiveness of liabilities.

(B) Non-produced and Non-financial assets

Land and subsoil assets, patents, copyrights, trademarks, franchises.

2. Financial Account
(C) Direct Investment External investments with lasting interest in enterprises.

(D) Portfolio Investment

External investments in securities and financial derivatives.

(E Other investment

External investments other than reserves, direct and portfolio investments. For example, short- and long-terms loans, trade credits, currency holdings and deposits, other accounts receivable and payable.

(F) Reserve Assets

Monetary gold, foreign exchange assets and other claims.

Disequilibrium in bop
The balance of payments measures the value of imports and exports. If the UK import more goods and services than we export then we have a deficit on the Current Account. A significant deficit on the current account is generally referred to as disequilibrium.

What are the Main Types of Disequilibrium in Balance of Payments?

1. Cyclical Disequilibrium: Cyclical disequilibrium in the balance of payments arises due to business cycles. It is caused (a) by cyclical patterns of income, or (b) by different income elasticity's, or (c) by different price elasticity's. 2. Secular Disequilibrium: Secular or long-term disequilibrium in balance of payments occurs because of long-seated and deep-rooted changes in the economy as it moves from one stage of growth to another,

(a) In the initial stages of economic development, domestic investment exceeds savings and imports exceed exports.
(b) Then comes a stage when domestic savings tend to exceed domestic investment and exports exceed imports.

3. Structural Disequilibrium: Structural disequilibrium in the balance of payments occurs when structural changes in some sectors of the economy alter the demand and supply forces influencing exports and imports. Structural disequilibrium is caused by changes in technology, tastes and attitude towards foreign investment. 4. Fundamental Disequilibrium: The term fundamental disequilibrium has been originally used by the I.M.F., to indicate a persistent and long-term disequilibrium in a country's balance of payments.

Measure 2 solve Disequilibrium in bop

All measures used for correcting BOP disequilibrium are broadly classified in to two. They are automatic measures and deliberate measures, deliberate measures are further classified in to monitory measures, trade measures and other measures. These are briefly explained as follows.. (A). Automatic measures: under Gold standard, the automatic working of the economy was correcting the BOP disequilibrium in the long run. When there was deficit, the gold was flowing out of the country. This was contracting the internal circulation of currency. Domestic prices were falling, exports were increasing and slowly the money flows out was flowing in. Automatic working is possible even under paper standard, the disequilibrium will be automatically restored if the market forces of demand and supply are allowed to have free play. A BOP deficit will increase the demand for foreign exchange. This increases the foreign exchange rate and decreases the external value of the domestic currency . As a result, export of the country become cheaper and imports costlier. This will restore equilibrium.

(B). Deliberate measures:automatic measures are less effective because these are long run in nature, so the deliberate measures are important.. (1).Monetary measures: deflation: this is used in the case of BOP deficit. A deflationary policy aims at reduction of prices and money income of people. Deflationary policy refers to the contraction of money supply. Devaluation:devaluation refers to the official decrease in the external value of a currency. This measure is adopted when country suffers from severe fundamental disequilibrium. A reduction external value of currency reduce imports, increases exports and restore value of currency. Exchange control: it refers to the regulation of exchange rates and imposition of restriction on the conversion of the local currency against foreign currency.

(2). Trade measures: export promotion measures import control measures

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(3). other measures: obtaining foreign loans provide incentives for foreign investments tourism development

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