Class 12 Economics What is Balance of Payment ? – (BOP Economics)
In this article, we will study the Components of BOP and BOP deficit from Economics class 12.
Balance Of Payment (BOP) refers to the systematic records of all economic transactions taking place between the residents of one country and resident of foreign countries during a given period of time. The transaction includes the sale of Indian goods and services and purchase of foreign goods. The economic transaction includes the transaction that causes the transfer of value in terms of foreign exchange.
“Balance of payment of a country is a systematic record of all business transactions between the resident of a reporting country and a resident of a foreign country during a given period of time, usually a year”. – Prof C P Kindle Berger
Economic transactions are related to Visible items (products), invisible items (services), capital transfer (capital receipts and payments) and unilateral transactions.
Components of a Balance of Payment
Current Account records transaction related to the produced goods, services and transfers during the current period. It records transactions related to
- Export and import of goods or merchandise- includes physical goods exported and imported. It records the company’s visible trade.
- Invisible items- items that are not tangible
- a) Services- includes receipts from the sale of services to foreign countries and payments for the purchase of services from a foreign country.
- b) Unilateral transfers- receipts that resident of a country gets at free of cost without any payments in return for gifts, donations, indemnity payments, etc and vice versa.
- c) Incomes- includes investment income and compensation of employees.
It records international economic transactions which are related to change in assets including financial and physical assets. It records short-term and long-term capital transactions.
Items in the capital account include
- Foreign investment- direct and portfolio investment from abroad.
- Loan-borrowing from the private individual, non-financial institutions, government, etc. It includes external assistance and commercial borrowing.
- Banking capital- capital transaction related to foreign exchange transactions and investment in foreign currency and securities.
- Rupee debt service- borrowings which are repaid through exports of goods or services.
- Monetary movement- includes purchase and repurchase from IMF and changes in foreign exchange reserves.
Categories of Balance Of Payment
Balance of trade– it refers to the difference between exports of goods and import of goods. It includes the value of tangible goods only.
Balance of trade= Export of goods- Import of goods
Balance of current account– it refers to measure of all the balance of import and export of goods and services including factor services.
Balance of current account= Balance of trade+ Balance of invisible + Balance of transfers.
Balance of Capital Account– include the balance of capital transfers, borrowing and lending and sale from a purchase of stocks of gold and foreign exchange.
The balance of payment refers to the situation when the total inflow on account of the autonomous transaction is less than the total outflow on account of such transactions. Here autonomous items are related to the economic transaction in the current account and capital account that is done with some economic motive like profit maximization. When autonomous receipts are less than the autonomous payments it is termed BOP deficit. For example, during the year autonomous inflow of foreign exchange is $500 and the total outflow is $600, the deficit will be $100.
Read another topic- Consumer Equilibrium
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