BALANCE OF PAYMENTS: Definition and Components


What is Balance of Payments

The balance of payments is a record of all commercial and financial transactions carried out by residents on the ground. The balance of Payments is divided into three main components: Current Account, Financial account, and the Capital account.

Current Account

The current account refers to the stresses that all transactions for the import and export of goods and services, and it is passing through a real-time.

Visible trade: Indian exports of money from your trading (eg cars sold in India), faith (increases) the reason for this is that while the grant imported goods (e.g. flat India, sold in the US) were used to. Is the sum of the difference in the balances of these works, the things that are in the art.

Lamb trade: Indian revenue from the sale of services abroad, which is invisible to export, eg an insurance premium paid by the UK to an Indian shipbroker.

When you have money, are living in the Indian in the streets of the services, such as a week’s accommodation between the parties in London, the invisible things of that to create it implies a kingdom that cometh, the recompense, and out of India.

The main things invisible

  • Government expenditure
  • Tourism
  • Interest, profit
  • Private transfers and dividends
  • Other financial services
  • Transport

Capital account

Investment: Investment includes the capital and other movements. The lack of delivery (-) exits enters and gives a surplus (+) on the ground. For example, if the slave trader inside bought a new shop in London, he was the first to head behind. Conversely, if Toyota (Japan) is building a showroom in Bangalore, an influx is a headache.

Devoured in expense portfolio (paper) is also included in the selection of the right reasons. So if a reward for their participation in Indian McDonald’s and General Motors (USA) as an outflow force of capital.

It can also be private and public investments between the parties. Paper buildings and private sector investments tend to last a long time. Investing for the public, on the other hand, only the accumulation of interests that flow from small countries to underdeveloped countries (i.e. for aid), where the act is not always profitable.

Short or long term flow to the head. In the short term, they tend to be unpredictable and volatile. Changed humor and good functionality favorable signs among people to get the benefit, interest rate spreads.

In the short term, reasons of financing the balance of payments net of the utility of inward investments do not require official repayment – accumulated reserves and loans could be repaid. However, in the long run can not be harmful. What it profits, interest, dividends and in the streets of the investment, and are let down in the unseen things from one source, so they run to weaken the patient.

Balancing Item: this is the coverage of the accounting errors and omissions scheme. A comparison figure is added – or subtracted – combined with the balances of current accounts and capital accounts. Because the balance of payments would always equal the sum of the high capital funding, exciting race pairs.

In order to accurately show how different the reasons given for this last figure were at two other forces, the use of the fruits should be counted from the fact that it is in the comparison of the article so that the sum of two of the same. It is a net number.

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Official Financing

Funding for the person Libra (as it is called the Roman flow currency) shows the currency balance and movements. A positive figure reveals a net flow of money into the country. Alternatively, the net output, which is represented by a negative number.

When this figure cannot be denied, to the extent that it must be or at the cost of:

(a) borrowing from other central banks and international organisations

(b) the use of reserves that have been saved over the years

(c) borrow and withdraw reserves.

When the balance for official financing is positive, we cannot repay their loans and replenish reserves. And sometimes governments borrow, the balance of official financing being positive; To this end, integrate it until the end.

The amount of public funding equal to the balance of government funding for the balance of payments is still over his head.

This funding is in place all demand in balance. This is called the balance of payments always in equilibrium.

History of the Balance of Payments (BOP)

Before the 19th century, international transactions were denominated in gold as was the flexibility of trade with countries in difficulty. Growth was low and the method of confirmation for the first time to pass to a nation’s commercial silver buyer.

The reasons integrated into the economic life of the nation itself, in fact, will not also be so, that we rarely find the differences causing a difficult trade imbalance. Became big; growing international economic integration, and the differences between the seriousness of the balance of the Benelux group began to occur more frequently.

The author of the Great Depression and brought him to some of the countries could withdraw gold, the Bretton wood stallion and the reason for the devaluation of massage were highly esteemed, but also in gold , is converted into dollars after World War II at fixed exchange rates in the 1970s at other massages.
Effect one at the same time can be, a lot of money, as in the case of America is not going to be improved and fully with the external aspects of the art Paying off a deficit of the form of government of central banks, and abandoning gold, the dollar is the reason, he continues.

However, when the Nixon shock, as if the last of the dollar and gold convertibility of what is known, the currencies floated on their own, as happens in the field of the experience of the art of a deficit of it can be an artificial depression of its currency, by hoarding these external aids, for example, to return the fruit can tempt the appetite or regions filled with everything. growth and exports are on the rise.

From the current increased mobility of the general to the same from the other side of the head of the end of the balance of payments to making him the cause of acute currency devaluation crises like those of all times, and he won in Southeast Asian countries.

Mounted in the recess in different regions, the author of a big boost in their exports and devaluation of Suspendisse to try it. All the major central banks of the world to the financial crisis then dramatically through an expansionary monetary policy execution. This has led other countries, currencies, especially in emerging markets, to recognize themselves against the US dollar and other major currencies.

Many of them, after their nations resolve the reins And he said, the monetary policy is still that they can be to help their exports, stagnating exports especially with those who were under pressure from the great liquid.

Economic Policy and the Balance of Payments

The balance of payments and international investment position data are essential for the formula into national and international economic policy. Some faces balance of payments data to and imbalances paid foreign direct investment, the key issues which are the country’s policymakers address in the search.

Which are the proper ones are more often targeted at the economic policies, on the other hand, an impact on the balance of payments as a general one. For instance, a part of the region attracts foreign investment used in a particular specifically designed to artificially stimulate exports and foreign exchange reserves; the other would want to have to build, as was the custom. The impact of these policies is ultimately not taken into account in the balance of payments data.


A country has a problem with its balance of payments section of the deficit or surplus from ordinary accounts. The developer left gravely deficient, as it is usually followed by an international trade surplus, as they fail to merge. Persistent imbalances indicate the fundamental imbalance in the balance of payments. Usually requires recourse to the government.

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