Posted by Anjali Kaur on Nov 20, 2020

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.

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Components of Balance of Payment

Balance of payment component or parts includes:

  1. Current account BOP
  2. Capital account BOP

Let’s discuss them in brief and simple way.

Current Account BOP

It is that account which records exports and imports of goods and services (invisible).

Current account includes the followings:

  1. Exports and imports of goods (visible) – Like the sale of a machine.
  2. 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.

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 which records all such transactions between resident of a country and 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.

Capital account of BOP includes the following:

1. Borrowing (External assistance and commercial borrowings)

It is recorded in the capital account as it impacts change in the ownership of assets abroad. It does not involve the movement of goods and services across the 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.

2. Investment

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 change 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 change 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:

The foreign exchange rate

The Budget Expenditure

The Budget Deficit

The Government Budget

Working of the Investment

Investment Multiplier

Types of Employment Equilibrium

Concept of Short-Term Equilibrium

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