Balance Of Payment

Topics: International economics, Balance of payments, Current account Pages: 15 (1336 words) Published: November 21, 2014


Balance of Payment
Balance of Payment is the recording system of economic and financial flows that take place over a specified time period between residents and non-residents of a given country. The residents of a country compromise of the general government, individual, private and non- profitable bodies serving individuals and enterprises. The Balance of Payment will consist mainly with three sections.

1. Current Account- This shows all the inflows and outflows of a country.

2. Capital Account- This records all the capital flows of the country.

3. Financial Accounts- This shares public and private investments and lending activities

The current account, the capital account and the financial account make up a country's balance of payments (BOP). Together, these three accounts tell a story about the state of an economy, its economic outlook and its strategies for achieving its desired goals. A large volume of imports and exports, for example, can indicate an open economy that supports free trade. On the other hand, a country that shows little international activity in its capital or financial account may have an underdeveloped capital market and little foreign currency entering the country in the form of foreign direct investment.

Current Account
This is the account which shows all the inflows and outflows of merchandise (goods, financial and non-financial services) with private and official transfers. This is an important account of the Balance of Payment and highly influence the total deficit or surplus of Balance of Payment. Format of the current account-

Total exports ( FOB )
xxxx
(-)Total imports ( FOB )
(xxxx)
Trade Balance
xxxx
Exports of non-financial services
xxxx
(-) Imports of non-financial services
(xxxx)
Investment incomes
xxxx
(-) Investment expenses
(xxxx)
(+) / (-) Private unrequited transfers
xxxx
(+) / (-) Public unrequited transfers (Total)
xxxx
Current account balance
xxxx

Trade surplus = exports > imports 
        (Inflow of cash > outflow of cash)

Trade deficit = imports > exports 
        (Outflow of cash > inflow of cash)
Import/ export of services

Exports / imports
In this section, all merchandise is accounted as imports and exports. (Free on Board)

Exports/ imports of non-financial services
This section may account all the non-financial services such as freight, insurance, passenger services and travel. Freight refers to mainly to carriage or transport of goods between countries. Transportation of services represents the travel expenses such as lodging, meals, entertainment and travel expenses.

Investment income/ expenditure
This section comprise of all incomes and expenses derived from the ownership of foreign financial assets and liabilities. The interest / dividends received or paid from portfolio investments.

The Balance of Payment uses the double entry system to record this information therefore, all the incomes are credit entries and all the expenses are debit entries. If we have a credit balance, the Balance of Payment of the country has a surplus and vice versa.

Private and official unrequited transfers
These are the transfers which occur between residents and the government between the countries. i. Private unrequited transfers –
It is mainly contributed by resident migrant worker remittances to their country of origin. e.g.: gifts, dowries, prices, charitable contributions.

ii. Official requited transfers –
This includes voluntary subsidies, military aid, and voluntary cancellation of debt contribution to international organizations, technical assistance, taxes and fines Capital Account

This is the account which consists with all inflows and outflows of a country which regard to investments and capital expenditure. A capital account consists with the following items Note:

Format of the capital account-

Direct investments
xxxx
Portfolio...
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