Meaning of Balance of Payment
Balance of payment is an account of all economic and financial transactions of the country with the rest of the world. It contains all international transactions of individuals, government and companies of a country made during a defined time period (i.e. quarterly or yearly).
Balance of payments is also known as the balance of international payments and abbreviated as B.O.P. It monitors all fund inflows and outflows of the nation and helps countries in developing better policies for their economic development.
Balance of payments is a means through which countries controls all their international monetary transactions. It denotes the value of imports and exports of the country and tells whether it has a surplus or deficit of funds. In a perfect scenario, the balance of payment should be zero which simply means the value of imports is equal to the value of exports. There are three important components of the balance of payment- Current account, capital account, and financial account.
Types of Balance of payments
Favorable Balance of payments
A favorable balance of payments means the value of exports of the country is more than the value of its imports. It is the excess of capital transferred to abroad plus goods and services exported over the goods and services imported plus capital transferred from abroad.
Favorable Balance of payments= Exports (capital transfers, goods, and services) > Imports (capital transfers, goods, and services)
Unfavorable Balance of Payments
Unfavorable balance of payments means the value of imports in the country is more than the value of its exports. It is the excess of capital transferred from abroad plus goods and services imported over the goods and services exported plus capital transferred to abroad.
Unfavorable balance of payments= Imports (capital transfers, goods, and services) > Exports (capital transfers, goods, and services)
Zero Balance of Payments
Zero balance of payments means the value of imports in the country is equal to the value of exports. The balance of payments is zero only in a perfect scenario which is rarely possible.
Zero balance of payments= Imports (capital transfers, goods, and services) = Exports (capital transfers, goods, and services)
Importance of Balance of payments
Monitor all International Transactions
Balance of payments monitors and records all international transactions of country with all other countries. It is an account that examines all import and export transactions and reveals the financial status of the country.
Forecast Business and Economic Conditions
Information contained in the balance of payments provides the basis for forecasting the business and economic conditions of the country. The government through the balance of payment can analyze the potential of various industries for export purposes and can accordingly frame policies to support them for their growth and development.
Helps in Regulating Import and Export
Balance of payment is a means through which import and export can be easily regulated. The government gets detailed information from it regarding a variety of products and services being imported or exported. It helps the government in taking protective measures like increasing tax or tariff on imports to discourage it while decreasing tax or tariff on exports to encourage it.
Clarifies Foreign Exchange Position
The balance of payment reveals the foreign exchange position of country. It monitors all international fund movements of the country and determines whether there is a shortage or surplus of funds.
Assist in Formulating Policies
Balance of payment is important to document with the government which helps in designing various policies and programs. It provides indications regarding economic state to the government which can be used by them in framing all monetary, fiscal, expansion and inflation control policies.