Importance of balance of payment pdf

Finally, a financial account is used to measure the changes in the foreign ownership of domestic assets along with the domestic ownership of foreign assets.

In an ideal scenario, the sum of all the transactions should be zero in the Balance of Payments. But, it is not the case due to various reasons such as difference in accounting practices and fluctuating exchange rate. The Balance of Payments is defined as the record of the difference between all money flowing into the country in a given time and the outflow of money to the rest of the world.

Usually, the Balance of Payments is computed in every quarter of the year and every year. All the international trades conducted by either public or private sectors are recorded in the Balance of Payments. It helps determine the amount of money coming in and going out of the country and thus the debit or the credit.

If the country has effectively received the money, then it is said to be credited. If it has paid or given away the money out of the country, then it is debited. The Balance of Payments is divided into three main categories depending upon the kind of transactions. These are the financial account, the current account, and the capital account. Here we discuss in brief what each of these means. The current account records the inflow and outflow of all the goods and services between the country and the rest of the world.

All the earnings through foreign investments, either public or private, are also counted in this category. The current account records the debits and credits on the trade of goods and services. Goods include raw materials and processed goods that are sold and purchased or are given as an aid. Services lead to receipts due to the services lent or received, such as tourism, transportation, education, engineering, business services, and the royalties in copyrights and patents.

Balance of trade makes the imports and exports of a country. More exports than imports mean Surplus Balance of trade; while the other way round means deficit. There is one more factor contributing to the current account, namely, unilateral transfers. They refer to the credits, i. These also include the foreign aid received by any country in times of need, such as calamities and disasters. Current account deficit occurs when the resident of a country spends more on imports than they save.

The capital account records all the capital transfers done internationally. It can also be understood as the disposal or the acquisition of non-financial assets needed for production. It monitors all fund inflows and outflows of the nation and helps countries in developing better policies for their economic development.

Balance of payments is a means through which countries controls all their international monetary transactions. It denotes the value of imports and exports of the country and tells whether it has a surplus or deficit of funds. In a perfect scenario, the balance of payment should be zero which simply means the value of imports is equal to the value of exports.

There are three important components of the balance of payment- Current account, capital account, and financial account. A favorable balance of payments means the value of exports of the country is more than the value of its imports. It is the excess of capital transferred to abroad plus goods and services exported over the goods and services imported plus capital transferred from abroad. Unfavorable balance of payments means the value of imports in the country is more than the value of its exports.

It is the excess of capital transferred from abroad plus goods and services imported over the goods and services exported plus capital transferred to abroad. Therefore the balance of payments may be used as an indicator of economic and political stability.

For example, if a country has a consistently positive BOP, this could mean that there is a significant foreign investment within that country. It may also mean that the country does not export much of its currency. IMF is the primary source of BoP and similar statistics data worldwide.

It prepares balance of payments manual and publishes the same in a Balance of Payments Year Book. Monetary and fiscal policy must take the BOP into account at the national level. Multinational businesses use various BOP measures to gauge the growth and health of specific types of trade or financial transactions by country and regions of the world against the home country.

BOP data may be important for the following reasons:.