The Balance of Payments

What is Balance of Payments?

The BoP or balance of payments record the undertakings or transactions of commodities, assets and services between citizens of a nation with the rest of the world for a stated time frame frequently every year. There are 2 main accounts in the BoP –

  • Current account
  • Capital account

Meaning:

  • Balance of Payment is a systematic record of all the economic /monetary transactions between residents (all the units) of a country and the rest of the world in an accounting year.
  • It is prepared on the principles of Double Entry System.

What is Current Account?

Current Account is the record of business in commodities, transfer payments and services. Trade in commodities comprises exports and imports of commodities. Trade in services comprises factor income and non-factor income transactions or undertakings. Transfer payments are the receipts which the citizens of a nation get for ‘free’, without having to provide any commodities or services in return. They comprise of remittances, grants and gifts. They could be provided by the government or by private residents living abroad.

The Balance of Payments

What is Capital Account?

Capital Account records all international undertakings of assets. An asset is any one of the types in which wealth can be held, for instance : stocks, bonds, Government debt, money etc., Purchase of assets is a debit on the capital account. If an Indian purchases a UK Car Company, it enters capital account undertakings as a debit (as foreign exchange is going out of India). On the other hand, sale of assets like sale of share of an Indian company to a Japanese customer is credit on the capital account. These items are Foreign Direct Investments – FDIs, Foreign Institutional Investments – FIIs, assistance and external borrowings.

The Balance of Payments

1 MARK QUESTIONS
Q.1-WHAT DOES BALANCE OF PAYMENT ACCOUNT OF A COUNTRY RECORD?
ANSWER:

Balance of Payment records all the economic/monetary transactions between residents (all the units) of a country and the rest of the world in an accounting year.

Q.2-WHAT ARE THE TWO COMPONENTS OF BALANCE OF PAYMENT?
ANSWER:

(i) Current Account.

(ii) Capital Account.

Q.3-WHAT IS THE OTHER NAME OF BALANCE OF PAYMENT?
ANSWER:

Balance of International payments.

Q.4-WHAT ARE ECONOMIC TRANSACTIONS?
ANSWER:

It refers to those transactions which involve money and transfer of the ownership of goods, services, assets etc.

Q.5-DEFINE CURRENT ACCOUNT.
ANSWER:

It is that part of BOP which includes export and import of goods & services, unilateral transfers and factor Incomes to and from abroad.

Q.6-STATE THE COMPONENTS OF CURRENT ACCOUNT.
ANSWER:

a) Import and Export of goods.

b) Import and Export of services.

c) Unilateral Transfers.

d) Factor incomes (COE, Interest, Dividend etc.).

The above mentioned is the concept that is explained in detail about The Balance of Payments for the class 12 students. To know more, stay tuned to BYJU’S.