Balance of Payment (BoP) of a country shows that country’s exposure to the external world. Briefly, BoP is the statement of assets and liabilities of a country as at the end of a certain date from/to the other countries in the world. When the receipts are more and the payments are less the BoP is said to be surplus. Similarly, if the payments are more, the BoP is said to be deficit.
BoP is divided into three parts. Initially, BoP is divided into current account and capital account. The current account is further broken into trading account and invisibles. Trading account shows purely trading transactions with the other countries. The difference between a country’s export and import is reflected in the trading account. When the import is more than export, the trade deficit arises and exports overtaking imports results into trade surplus.
Current account represents the trade transactions plus the invisibles. The invisibles have three parts viz. the services, transfers and income. Services include the travel, transportation, insurance, G.n.i.e( Government not included elsewhere) which include software services. Transfers are private or official. Income includes the investment income such as interest, dividend etc. and compensation to employees G.n.i.e represents the amount spent on the personnel deputed abroad on assignment like UN, reimbursement of expenses on personnel deputed to India from abroad etc. The balance in current account can be a deficit or surplus. A deficit in current account occurs when the payments overtake the receipts. When country is having excessive borrowings, the debt servicing becomes costly and this can take the current account to a deficit. The excessive dependence on cross-border borrowings takes place due to low domestic capital formation, which is the outcome of low domestic savings. Therefore, theoretically, the domestic savings and current account balance has some connection.
The capital account on the other hand represents all capital remittances. The capital account transactions are divided into long term and short term transactions. The long term transactions are direct investments abroad, direct foreign investments portfolio investments and loans. The loans are official and private and only the net balance is shown. The balance of current account plus the balance of long term capital account shows the basic balance. The short term transactions involve the holdings with banks and other short term transactions. The overall balance is arrived at by adjusting the errors and omissions.
Another important component of Balance of Payment is the official reserves. The foreign exchange reserves represent the balancing figure and include SDR allocations by IMF and net official reserves. The balance of payment is said to be in equilibrium when a surplus of deficit is eliminated. Equilibrium is a rare phenomenon and common feature is disequilibrium. When the balance of payment of a country moves adversely, the IMF helps that country to switch over the crisis through external assistance. This can be either through SDR allocation or a currency loan. Generally,
BoP is divided into three parts. Initially, BoP is divided into current account and capital account. The current account is further broken into trading account and invisibles. Trading account shows purely trading transactions with the other countries. The difference between a country’s export and import is reflected in the trading account. When the import is more than export, the trade deficit arises and exports overtaking imports results into trade surplus.
Current account represents the trade transactions plus the invisibles. The invisibles have three parts viz. the services, transfers and income. Services include the travel, transportation, insurance, G.n.i.e( Government not included elsewhere) which include software services. Transfers are private or official. Income includes the investment income such as interest, dividend etc. and compensation to employees G.n.i.e represents the amount spent on the personnel deputed abroad on assignment like UN, reimbursement of expenses on personnel deputed to India from abroad etc. The balance in current account can be a deficit or surplus. A deficit in current account occurs when the payments overtake the receipts. When country is having excessive borrowings, the debt servicing becomes costly and this can take the current account to a deficit. The excessive dependence on cross-border borrowings takes place due to low domestic capital formation, which is the outcome of low domestic savings. Therefore, theoretically, the domestic savings and current account balance has some connection.
The capital account on the other hand represents all capital remittances. The capital account transactions are divided into long term and short term transactions. The long term transactions are direct investments abroad, direct foreign investments portfolio investments and loans. The loans are official and private and only the net balance is shown. The balance of current account plus the balance of long term capital account shows the basic balance. The short term transactions involve the holdings with banks and other short term transactions. The overall balance is arrived at by adjusting the errors and omissions.
Another important component of Balance of Payment is the official reserves. The foreign exchange reserves represent the balancing figure and include SDR allocations by IMF and net official reserves. The balance of payment is said to be in equilibrium when a surplus of deficit is eliminated. Equilibrium is a rare phenomenon and common feature is disequilibrium. When the balance of payment of a country moves adversely, the IMF helps that country to switch over the crisis through external assistance. This can be either through SDR allocation or a currency loan. Generally,
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