Q.
Explain the following terms:-
e) Balance of Payment. (4 marks)
(4 marks, 2011 Q8e)
What do you understand by "Balance of Payment"?
A.
Balance of Payment (BoP) of a country is defined as, "Systematic record of all economic transactions between its residents and non-residents of foreign countries" Thus balance of payments includes all visible and non-visible transactions of a country during a given period, usually a year. It represents a summation of country's current demand and supply of the claims on foreign currencies and of foreign claims on its currency.[1]
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.[2] These transactions include payments for the country's exports and imports of goods, services, financial capital, andfinancial transfers. The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.
Ref:
Wikipedia at http://en.wikipedia.org/wiki/Balance_of_payments
Another better understandings of BoP is as below:
A statement that summarizes an economy’s transactions with the rest of the world for a specified time period. The balance of payments, also known as balance of international payments, encompasses all transactions between a country’s residents and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts.
The balance of payments classifies these transactions in two accounts – the current account and the capital account. The current account includes transactions in goods, services, investment income and current transfers, while the capital account mainly includes transactions in financial instruments. An economy’s balance of payments transactions and international investment position (IIP) together constitute its set of international accounts.
Ref:
Investopedia from http://www.investopedia.com/terms/b/bop.asp
Balance of Payment- Interpretation
The balance-of-payments accounts of a country record the payments and receipts of the residents of the country in their transactions with residents of other countries. If all transactions are included, the payments and receipts of each country are, and must be, equal. Any apparent inequality simply leaves one country acquiring assets in the others. For example, if Americans buy automobiles from Japan, and have no other transactions with Japan, the Japanese must end up holding dollars, which they may hold in the form of bank deposits in the United States or in some other U.S. investment. The payments Americans make to Japan for automobiles are balanced by the payments Japanese make to U.S. individuals and institutions, including banks, for the acquisition of dollar assets. Put another way, Japan sold the United States automobiles, and the United States sold Japan dollars or dollar-denominated assets such as treasury bills and New York office buildings.
Although the totals of payments and receipts are necessarily equal, there will be inequalities—excesses of payments or receipts, called deficits or surpluses—in particular kinds of transactions. Thus, there can be a deficit or surplus in any of the following: merchandise trade (goods), services trade, foreign investment income, unilateral transfers (foreign aid), private investment, the flow of gold and money between central banks and treasuries, or any combination of these or other international transactions. The statement that a country has a deficit or surplus in its “balance of payments” must refer to some particular class of transactions. As Table 1 shows, in 2004 the United States had a deficit in goods of $665.4 billion but a surplus in services of $48.8 billion.
Ref:
Library of Economic Liberty at http://www.econlib.org/library/Enc/BalanceofPayments.html
Ref:
Library of Economic Liberty at http://www.econlib.org/library/Enc/BalanceofPayments.html