Balance of Payment : Basics

The balance of payment is a systematic record of all economic transactions of the residents of a country with other countries during a given period of time. There is a difference between  Balance of trade (BOT) & Balance of Payments (BOP). BOP is the difference in the values of imports and exports of commodities only. Movement of goods between the two countries is known as the visible trade because the movement is open and can be verified by the customs officials. It may be of three types:

When during a period of time the values of export and imports of commodities of a country are equal, the balance of trade is said to be in balance of trade. A favorable balance of trade is said to occur when the value of export exceeds the value of imports during a period of time.  An adverse or unfavorable balance of trade is said to occur when the value of imports of a country exceeds the value of exports during a period of time.

The balance of payment has two account namely Current account & Capital account. BOP on current account is a more comprehensive in scope than the balance of trade. It includes not only imports and exports of goods which are visible items but also invisible items such as services of shipping, banking, insurance, tourism interest on foreign debt. There are three components of the balance of payments on current account; Visible items ( Export and import of goods) ,Invisible items which includes non factor services such as travel, transportations, insurance, banking, interest on loans given, private transfers such as remittances from abroad & Unilateral Transfers such as Financial help to earthquake victims.

BOP records transactions of capital nature, It records transactions relating to both goods and services, It is a wider concept because it includes the balance of trade, balance of services, balance of unilateral  transfers and balance of capital transactions, it always remains in balance in accounting sense because receipts side is always made to be equal to payment side.

Click here for government certification in Accounting, Banking & Finance