The monetary transactions that happen between a resident of the country and the rest of the world are recorded. These are recorded in a statement called the balance of payment. Structure of balance of payments includes current account, capital account, etc.
Balance of Payment
Balance of payment includes all the transactions that are made by corporates, individuals, and the government. Thus, it helps in monitoring the funds for the development of the country. So, when all the elements are added in the BOP, it should essentially sum up to zero.
Thus, the inflows and outflows of a country should balance out. But in reality, this does not happen. This statement is useful to identify whether the country has a surplus or deficit. Thus, to identify it the country has more exports or more imports.
The BOP for a country is vital for the following reasons:
- It reveals the economic and financial details of a country.
- The BOP statement can be an indicator to determine whether the currency of a country is appreciating or depreciating.
- Also, BOP helps the government on trade and fiscal policies.
- Thus, it provides important information to understand and analyze the economic dealings of one country with the other.
Structure of Balance of Payments
There are three main components that form the basis of the structure of balance of payments. The financial account, capital account, and current account.
The current account is useful for monitoring inflow and outflow of goods and services. Thus, this account covers all the payments and receipts that are made with respect to manufactured goods and raw materials. Furthermore, it also includes receipts from tourism, engineering, business services, transportation, etc.
There are many categories of trades that occur between the countries. These trades could be visible or invisible. When trades happen in goods between the countries than it is called as visible items. While the trade happening in import or exports of services, is referred to as invisible items.
The capital transactions that occur between the countries are monitored under the capital account. Thus, capital transactions include the sale and purchase of assets like properties. Furthermore, the capital account also includes the flow of taxes, sales and purchases of fixed assets for a migrant moving in or out of the country. The three major elements of the capital account are investments, foreign exchange reserves, and loans and borrowings.
The flow of funds to and from foreign countries via various investments in real estate, FDI, business ventures, etc are monitored through the financial account. Also, this account measures the variation in foreign ownership. When you analyze this, you can understand whether a country us acquiring more or selling more.
Suppose the value of exported goods via India is 110 crores. While the value of imported goods to India is 90 crores. Thus, it can be said that India has a trade surplus of 20 crores.
BOP helps as an economic indicator in order to identify a trade surplus or deficit of a country. There are many components in BOP that provides a clear indication of which sector is doing economically well.
Questions on Structure of Balance of Payments
Q. Based on the balance of payment, which of the following terms constitute the current account?
A. Balance of invisible
B. Balance of trade
C. Both A and B
D. None of the above
Answer: C. Both A and B