What is the Balance of Payment (BOP)?
The balance of payment is the statement that files all the transaction between the entities, government anatomy or individuals of one country to another for a given period of time. All the transaction details are mentioned in the statement, giving the authority a clear vision of the flow of fund. After all the items are included in the statement, the inflow and outflow of the fund should match. For a country, the Balance of Payment specifies whether the country has an excess or shortage of funds. It gives an indication of whether the country’s export is more than its import or vice-versa.
Types of Balance of Payment:
The balance of payment is divided into 3 types:
- Current Account: This account scans all the incoming and outgoing of goods and services between countries. All the payment made for raw materials and constructed goods is covered under this account. Few other deliveries that include in this category are from tourism, engineering, stocks, business services, transportation, and royalties from license and copyrights; all these combined together make a BOP of a country.
- Capital Account: Capital transaction like purchase and sale of assets (non-financial) like land and properties are monitored under this account. This account also records the flow of taxes, acquisition and sale of fixed assets by immigrants moving into the different country. The shortage or excess in the current account is governed by the finance from the capital account and vice versa.
- Finance Account: The funds that flow to and from other countries through investments like real estate, foreign direct investments, business enterprises, etc. is recorded in this account. The account calculates the foreign proprietor of domestic asset and domestic proprietor of foreign assets and analyses if it’s acquiring or selling more assets like stocks, gold, equity etc.
Importance of Balance of Payment:
A balance of payment is an essential document in the finance department or transaction as it gives the status of a country and it’s economy. The importance of the balance of payment can be calculated from the below points:
- It examines the transaction of all the export and import of goods and services for a given period
- It helps the government to analyse the potential of a particular industry export growth and formulate policy to support that growth
- It gives the government a broad perspective on a different range of import and export tariff. The government then takes measure to increase and decrease the tax to discourage import and encourage export respectively and be self-sufficient
- If the economy urges support in the mode of import, the government plan according to the BOP and divert the cash flow and technology to the unfavourable sector of the economy, and seek future growth
- The Balance of Payment also indicates the government to detect the state of the economy, and plan expansion, monetary, and fiscal policy establish on that
The above mentioned is the concept, that is elucidated in detail about ‘Types of Balance of Payment?’ for the Commerce students. To know more, stay tuned to BYJU’S.