What is the meaning of Balance Of Payment (BOP)?

Balance of Payment is a statement is a summary of a nation’s economic transactions with the rest of the world for a specified time period. The balance of payments, also known as balance of international payments consists of all transactions between a country’s residents and its non-residents which involves goods, services and income, financial claims, gifts and any other liabilities to the rest of the world. The balance of payments classifies these transactions in two accounts – the current account and the capital account. The current account includes transactions in goods, services, investment income and current transfers, while the capital account mainly includes transactions in financial instruments.

Why is the Balance of Payment important?

Usually we calculate BOP every quarter. BOP consists of accounts of all trades conducted by both the private and public sectors. It helps in determining how much money is going in and out of a country. When a country receives money, this goes into the credit account and if a country has made a payment, that goes into debit. Ideally, BOP should be at zero which means that assets (credits) and liabilities (debits) should be equal. But in practice, this is rarely happens. Hence by looking at a country’s BOP account, we can easily figure out whether a country is running into deficit or surplus and from which part of the economy the discrepancies are stemming.

What are the components of the balance of payments?

The balance of payments has three components. They are:- the financial account, the capital account and the current account. The financial account describes the change in international ownership of assets. The capital account includes any financial transactions that don’t affect economic output. The current account measures international trade, the net income on investments and direct payments.

How do you measure balance of payments?

To measure balance of payment, calculate:-

  1. the sum of inflow of foreign currency (through export),
  2. the outflow of foreign currency (import)

BOP = Export (X) – Import (I)

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