Balance of Payment
Balance of payment of a country is a systematic record for the economic transactions between residents of a country and residents of a foreign country during a given period of time.
Let’s understand this topic in detail.
A quick note: Subscribe to our website to get answers to your curriculum questions.
Components of Balance of Payment
Balance of payment component or parts includes:
- Current account BOP
- Capital account BOP
Let’s discuss them in a brief and simple way.
Current Account BOP
It is that account that records exports and imports of goods and services (invisible).
The current account includes the following:
- Exports and imports of goods (visible) – Like the sale of a machine.
- Exports and imports of services (invisible) – It includes the following: a. Non Factor services, that are exports and imports of services of doctors, teachers. b. Income from factor services like plumber, electrician, etc. More examples includes, air and sea transport, postal and courier services and education-related travel.
3. Unilateral Transfers- These are those receipts which resident of a country receives or the payments that the resident of a country make without getting anything in return. For example, gifts, charity, donation, etc.
Capital Account BOP
It is that account that records all such transactions between residents of a country and the rest of the world which cause a change in the ownership of goods. It is the statement of all the capital inflow and outflow during a period of an accounting year.
The capital account of BOP includes the following:
1. Borrowing (External assistance and commercial borrowings)
It is recorded in the capital account as it impacts changes in the ownership of assets abroad. It does not involve the movement of goods and services across borders.
Borrowings are recorded with a plus or credit side of the BOP account because it leads to receipts of foreign exchange from the rest of the world.
The investment includes FDI as well as portfolio investment or Foreign investment or foreign institutional investment. Foreign investment in India is recorded in the capital account of the BOP.
It is reflected in the capital account as it impacts changes in the ownership of assets. It does not involve the movement of goods and services across borders.
3. Other capital like lending
India lending abroad is recorded in the capital account of the BOP. It is reflected in the capital account as it impacts changes in the ownership of assets. It does not involve the movement of goods and services,
Also lending abroad is recorded with a negative or on the debit side of the BOP account. This is because it leads to the payment of foreign exchange to the rest of the world.
Thank You for reading.
You can read the related post on macroeconomics:
Feel free to join our Facebook group and subscribe to this website to get daily educational content in your mailbox.
Disclosure: Some of the links on the website are adds, meaning at no additional cost to you, I will earn a commission if you click through or make a purchase. Please support me so that I can continue writing great content for you.