Last updated on April 11th, 2024 at 01:12 am
In this blog post, we will discuss the meaning, characteristics, and importance of Balance Of Payment. Balance Of Payment – BOP is a term associated with international finance. In international finance, an international transaction in the global market is studied. BOP studies those international transactions from a country’s point of view.
Balance Of Payment is an essential aspect for any country. BOP helps the country to understand its international business and transactions. BOP also allows the government to establish its position in the world market. There are many more aspects in which BOP is helpful. We will discuss these aspects in detail in this blog post.
Before we study the importance of Balance Of Payment, let us first understand what Balance Of Payment is –
What is a Balance Of Payment?
A Balance of Payment account contains accounting records. The BOP records all the transactions between the home country and other countries. These records include data about the country’s imports & exports. BOP also accounts for the trade of goods & services, financial capital, and financial transfers.
A country’s Balance Of Payment account deals with four types of items. They are –
Tangible Goods
Tangible goods are the items that we can touch or see. Tangible goods are physical goods. Mobiles, earphones, books, etc., are examples of real goods.
Intangible Goods
Intangible goods are the opposite of tangible goods. Intangible goods cannot be touched or seen. Intangible goods refer to services. Music, Videos, subscriptions, etc., are some intangible goods.
Unilateral Transfers
A unilateral transfer refers to a one-way transaction. Unilateral transfers include the transfer of capital, goods, and services.
Capital Exchange
Capital exchange refers to money transfers between countries. It includes both-way transactions – capital received and capital sent.
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Definition
According to Kindle Berger, “The Balance Of Payments of a country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period.”
There are two types of accounts in Balance Of Payment. They are –
Capital account
The capital account shows the net change in ownership of assets. Capital accounts include the capital transfer between countries.
Current Account
The current account presents the net income of the country. Current account include the transfer of tangible goods, intangible goods, and unilateral and capital transfers.
Before we move on to the details about the importance of Balance Of Payment, let’s look at the features of Balance Of Payment.
Characteristics of Balance Of Payment
- BOP records every economic transaction between the home country and other countries.
- BOP includes tangible and intangible goods transactions, Unilateral and two-way capital transfers.
- The Balance Of Payment is recorded and utilized for a specific period. Usually, it is an annual statement.
- Balance Of Payment account uses a double-entry accounting system. This technique includes a Debit side and a credit side. Receipts are recorded on the credit side. Payments are recorded on the debit side of the system.
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Importance of Balance Of Payment
- The Balance Of Payments helps the country to determine its economic condition.
- The BOP is essential in making a country’s monetary and fiscal policies.
- It provides information about the imports & exports of the country. This data helps to determine the plan of action moving forward. If the import is less, the government can decrease import taxes and encourage businesses to export more.
- BOP helps the country to understand what goods & services they export or import the most. This allows the government to plan so that the export increases and the import reduces.
- The Balance Of Payment records all the transaction data during a specific period.
- BOP data is used by businesses to analyze the market potential of a country. A country with high imports may have high tariffs on imports. This type of market yields low profits for the business.
- The Balance Of Payments helps countries to recognize the value of their currency. It also helps to understand the fluctuations in their currency.
- BOP helps to understand the relationship between countries.
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FAQs
What are the two main components of Balance Of Payment?
The current account and capital account are the two main components of the Balance Of Payment.
What are the effects of balance of Payment?
Change in exchange rates is the primary and most crucial effect because of the change in the Balance Of Payment.
Closing Statement
The Balance Of Payment is a significant financial aspect for every country. It provides the nation with valuable data which can be used to plan for the upcoming period. Even though it allows for valuable data, positively and negatively, the Balance Of Payment always equals out.
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I hope this Blogpost about The Importance of Balance Of Payment is informative. If you have any doubts or suggestions, make your mind Payment in the comment box.
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