BALANCE OF PAYMENT

Balance of payment (BOP) on a very large scale is said to be the record of all transactions involving money or in other words economic transactions of a country for a particular time period (mostly time period is for a year).

A year is considered best time period because for such a long period the transactions can be recorded for a large amount whereas for a small amount in small period we need same amount of resources as for large sum so, best is to use resources for a large amount.

Also if transactions are calculated for small time period we will not be able to obtain accurate results whether we land on surplus or deficit. hence it will be difficult for us to make any decision related to profits or loss, thus it is calculated merely for a year.

BOP can also be explained as the record of the transactions between the individuals living in a country with rest living outside the nation. Here, Individuals is written on the behalf of all people, firms (public and private) existing in the country. Eg- The simple export/import.

Surplus and deficit statement ( alternate for BOP ).The investments, exports, and other positive cash inflows are placed under the surplus heading. While loans, imports and other negative outflows are placed under deficit items.

These transactions are calculated in domestic currency. The positive or negative balance is also retained in domestic currency.

Balance of payment is also a condition when the sum of positive and negative items is zero. Then the situation is said to balanced.

1) SURPLUS BOP- It is the situation when total inflows are greater than outflows, (cash inflows>cash outflows). Then we can say we have a positive BOP.

2) DEFICIT BOP- It is the situation when total outflows are greater than inflows, (cash outflows>cash inflows). Then we can say we have a negative BOP.

BOP is connected with two important terms that are major part of BOP.

1) Current account that shows transactions in BOT or balance of trade it means (exports-imports) that is earnings from exports minus outflow from imports. If it is positive surplus makes a way otherwise deficit.

2) Capital account shows the other purchasing of assets or investments by a country with rest of the world. In the similar manner if the purchases of foreign assets is more than the sale then it is negative flow.

So, we can derive BOP as-

positive BOP = excess balance of current a/c + excess balance of capital a/c.

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