What is Balance of Payment?
The BOP is the documentation of all international trade and financial undertakings made by a nation’s citizens. A nation’s BOP tells you whether it saves sufficient to pay for its imports. It also discloses whether the nation manufactures enough economic output to pay for its growth. The BOP is reported once in a quarter or a year.
The actuality of international payments is that just like an individual who expends more than their earning must finance the distinction by selling assets or by borrowing, a nation that has a shortfall in its current account (expending more than it receives from sales to the rest of the world) must finance it by selling assets or by borrowing abroad. Hence, any current account shortfall or deficit must be financed by a capital account surplus, i.e, a net capital inflow:
current account + capital account = 0
What is Balance of Payments Surplus?
The account by which the money coming into a nation is more than the money going out in a particular time frame.
What is Balance of Payments Deficit?
A balance of payments deficit means the nation imports more commodities, capital and services than it exports. It must take from other nations to pay for its imports.
The nation could use its reserves of foreign exchange in order to balance any shortfall in its BoP:
- When the foreign exchange is being sold by the reserve bank when there is a deficit, it is known as official reserve sale
- The decrease or increase in official reserves is known as the overall balance of payments deficit or surplus
- The fundamental hypothesis is that the monetary authorities are the final financiers of any deficit in the BoP(or the recipients of any surplus
- Official reserve transactions are relevant under a reign of the fixed exchange rates than when exchange rates are floating
The above mentioned is the concept that is explained in detail about Balance of Payments Surplus and Deficit for the class 12 students. To know more, stay tuned to BYJU’S.