BALANCE OF PAYMENT: Definition, BOT&BOP,Nature,components and many more in detail......

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BALANCE OF PAYMENT



|DEFINATION|

Balance Of Payments can be termed as the systematic record of a country’s economic and financial transactions with the rest of the world over a given period of time. In a nutshell, the balance of payment comprises:-

  • Transactions connected to goods and services and income amongst India and the rest of the world.
  • Changes in Indian monetary gold, special drawing rights, and claims on liabilities to the rest of the world.

| BOP FORMULA |



| BALANCE OF TRADE AND BALANCE OF PAYMENTS | (BOT & BOP)

  • BOT:- Balance of Trade is defined as the difference in values between a country's imports and exports. 
  • BOP:- Balance of Payments is defined as the difference in total values between payments in and out of a country over a period of time.


| NATURE OF BALANCE OF PAYMENTS ACCOUNTING |

  • The transactions that fall under the category of Balance of Payments are documented in the standard double-entry book-keeping form, under which each worldwide transaction undertaken by the country leads to a credit entry and a debit entry of equal size.
  • Since the international transactions are recorded in the double-entry book-keeping form, the balance of payments must always balance, i.e., the total amount of debit need to be equal to the total amount of credits. At times, the balancing item, error, and omissions, need to be added to balance the balance of payments. 

| COMPONENTS OF BALANCE OF PAYMENT |

  1. Current Account
  2. Capital Account
  3. Unilateral Payments Account
  4. Official Settlement Account

          1. CURRENT ACCOUNT:                              

The current account on the balance of payments measures the inflow and outflow of goods,  services, investment incomes, and transfer payments. The main components of the current account are:

              1. Trade-in goods (visible balance), e.g. Merchandise
              2. Trade-in services (invisible balance), e.g. insurance and services

         2. CAPITAL ACCOUNT
  • All the short-term and long term transactions come under the Capital Account.
  • A capital outflow indicates a debit and a capital inflow signifies a credit.
  • For example, if an American firm is investing Rs.100 million in India, this transaction would be depicted as a debit in the US balance of payments and credit in the balance of payments of India.
  • Since the payment of interest on loans and dividend payments are actually the payments for the services of capital, hence they are recorded in the Current account. 
  • As it is already specified above that the interest paid on loan given or foreign investments by any nation in our country and the dividend or interest paid on those loans and foreign investments are recorded in the debit side, while, on the other hand, the interest received on loans given abroad and dividends on investments abroad are recorded on the credit side.
3. UNILATERAL TRANSFERS ACCOUNT

Unilateral transfers are one part of the current account of the balance of payments. It tracks the "one-way" transfer of funds from one country to another that is made without any counterflow or exchange or goods and services. These payments are merely gifts from one country to another. 

4. OFFICIAL SETTLEMENT ACCOUNTS

An official settlement account is an account that records transactions of foreign exchange reserves, bank deposits, and gold at a central bank. For example, the Federal Reserve uses official settlement accounts to keep track of its transactions in gold, dollars or other assets with other countries' central banks.

The official settlement account is a crucial component in the nation's balance of payments. Though the account may keep track of specific transactions, it also helps record a country's assets with other banks, whether it is running a deficit or surplus in those assets and the movement of dollars to foreign governments.


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