What is Balance of Payment?
The balance of payment is an important concept in the study of commerce and economics. The balance of payment is discussed very briefly in Chapter 6 called Open economy macroeconomics of the NCERT book of Class 12, this chapter is prescribed by the Central Board of secondary education and it holds significant weightage in the board examination that is held by the CBSE.
The study material on Vedantu, on the topic balance of payments, explains the complex concepts in a simplified language. It explains in detail what a balance of payment is, what are the inflow and outflow of foreign currencies, the types of balance payment accounts, The importance of balance of payment. Other details about the balance of payments can be accessed by visiting Vedantu’s website, Vedantu gives a comprehensive understanding of the topic, the study material provided by Vedantu is a product of intensive research and planning, the study notes are up-to-date and contain all the minute details that are important for the understanding of a particular concept.
What is an Open Economy
An open economy is an economy that has a trading relationship with other nations in goods and services or financial assets. For example, Indians like to use products from foreign countries and therefore some of the production is also exported to other foreign countries therefore foreign trade is responsible for influencing Indian aggregate demand.
In an open economy, it is important to have a balance of payments as it records the transactions made in goods, services and also the assets between residents of a country with the rest of the world, the balance of payments records transactions for a specified time period which is typically a year. In simple words a bop can be defined as a record which contains a summary of all the transactions undertaken by the firms, government institutions, individuals of a country with the firms, government institutions, individuals of other foreign countries.There are three types of payment accounts in a balance of payment or BOP, That are – current account, capital account, and finance account. Transactions taken up by net trade in goods and services, net transfer payments, net earnings on cross border investment are all recorded in the current account. The capital account is responsible for recording the transactions of a nation’s financial instruments and central bank reserves. Finance account deals with all the transactions which include ownership change for foreign assets between a nation’s residents and non-residents.
Importance of Balance of Payment
The importance of Balance of Payment account can be gauged from the following pointers –A financial record such as the BOP analyzes all the transactions under any nation’s economy regarding goods and services’ exports and imports and other finances for a financial year.The BOP helps the government to identify the various sectors in its economy, which possess the potential for export-oriented growth.With the help of the BOP, the government can implement higher tariffs and tax rates on the inflow of foreign exchange to encourage domestic industries to become more self-sufficient and minimize non-essential items’ import.If a nation possesses a flourishing export trade, its BOP can provide the government with accurate details so that it can adopt measures like currency devaluation to let its goods and services be availed at affordable rates and thereby improve foreign exchange outflow exponentially.Another important reason why a BOP account is essential for an economy is that it is a major indicator for a government to formulate its standards on monetary and fiscal policies, control of inflation, etc. Students can gain a more in-depth idea about Balance of Payment with study materials provided by Vedantu online. Check out available study material and online classes today for better exam preparations.
Key Components that are studied in Relation to the Balance of Payments-
BoP Surplus and Deficit
The Foreign Exchange Market
Determination of the Exchange Rate
Flexible Exchange Rates
Fixed Exchange Rates
Managed Floating
The determination of income in an Open Economy
National Income Identity for an Open Economy
Equilibrium Output and the Trade Balance
Trade Deficits, Savings And Investment
FAQs on Balance of Payment
1. What is a Balance of Payment?
The balance of payments is a statement of payments which includes the transactions that are carried out in goods, services, residents of countries and also between the rest of the world. These transactions are recorded during a given period, typically a year or quarter of a year. The balance of payment is a statement that records the transactions made in goods, services and between residents of a country and the rest of the world during a given period. It is a statement that includes all the transactions that are made by government bodies, forms, individuals of a country, the BOP helps to monitor the flow of funds to develop the economy.
When a balance of payment includes all the elements in the correct order, the sum should be zero which is a perfect scenario as it is a balanced payment, which means that the inflows and outflows of funds are all balanced.
2. What are the Types of Balance of Payment?
There are three types of balance of payment accounts, namely, current account, capital account, finance account.
Current account –A current account of the balance of payment lists all the details about the inflow and outflow of certain commodities and services between two nations, the balance of commodities and services mentioned in the current account are- Balance of trade in goods, Balance of trade in services, Net primary income, net secondary income.
Capital account- Capital account of the balance of payment includes purchases in non-financial elements. The balances included in the capital account are - Patents and copyrights’ sale, Ownership of franchises etc, Fixed assets ownership transfer.
Finance account- The finance account deals with all the transactions which include ownership change for foreign assets between a nation’s residents and non-residents. Three essential aspects of a financial account are- Foreign direct investment flows, banking flows and portfolio flows.
3. Where can I find detailed information on the balance of payments?
Students can find a detailed analysis of what a balance of payment is and its importance in an open economy, the study notes can be accessed by visiting Vedantu's website, which contains a detailed analysis of numerous topics that are of importance in economics, commerce and various other subjects.
4. What is the importance of a balance of payments?
It is necessary for an open economy such as India to have a balance of payment because any financial records such as the balance of payment gives an analysis of all the transactions that have been carried out by a nation’s economy, which is mainly regarding goods and services, imports and exports as well as other finances for a given financial year.
It also helps the government of a country to pick out particular sectors of the economy which possess the potential for growth in exports.
With the help of a balance of payment record, governments can encourage various domestic industries to come up and become self-sufficient, it can also minimise non-essential items imports by implementing higher tariffs or tax rates on foreign exchange.
A financial record such as the BOP analyses all the transactions under any nation’s economy regarding goods and services exports and imports and other finances for a financial year.
The BOP helps the government to identify the various sectors in its economy, which possess the potential for export-oriented growth.
With the help of the BOP, the government can implement higher tariffs and tax rates on the inflow of foreign exchange to encourage domestic industries to become more self-sufficient and minimize non-essential items’ imports.
If a nation possesses a flourishing export trade, its BOP can provide the government with accurate details so that it can adopt measures like currency devaluation to let its goods and services be available at affordable rates and thereby improve foreign exchange outflow exponentially.
5. What is bop surplus and deficit?
A country’s balance of payment shows if the country has enough to pay for its imports. A balance of payment also reveals if the country has enough economic output to pay for its growth.
A balance of payment deficit means that the country is importing more goods and services than exporting. Therefore it must borrow from other countries to pay for its imports.
A balance of payment surplus means that the country is able to export more than what it imports and therefore can provide for all domestic production and can also lend to other countries outside its borders.
