Balance of Payments: Concepts, Components, Importance, Examples (2024)

Open Economy Macroeconomics

As a child, you must have often seen your parents settling accounts and keeping tabs on small expenditures. You must have seen them set aside reserves, keep a record of all transactions and purchases, and tally their accounts and statements to ensure they are all set for the month or the quarter.Now apply this scenario to the country as a whole. And that’s Balance of Payments in layman terms.

Suggested Videos

').appendTo(this.scroller));n2const.rtl.isRtl?(this.previous=this.$widget.find(".nextend-thumbnail-next").on("click",this.previousPane.bind(this)),this.next=this.$widget.find(".nextend-thumbnail-previous").on("click",this.nextPane.bind(this))):(this.previous=this.$widget.find(".nextend-thumbnail-previous").on("click",this.previousPane.bind(this)),this.next=this.$widget.find(".nextend-thumbnail-next").on("click",this.nextPane.bind(this))),this.slider.stages.done("BeforeShow",this.onBeforeShow.bind(this)),this.slider.stages.done("WidgetsReady",this.onWidgetsReady.bind(this))},t.prototype.renderThumbnails=function(){var t;this.parameters.invertGroupDirection&&(t=Math.ceil(this.slider.visibleRealSlides.length/this.group));for(var i=0;i

');if(this.parameters.invertGroupDirection?s.appendTo(this.$groups.eq(Math.floor(i/t))):s.appendTo(this.$groups.eq(i%this.group)),s.data("slide",e),e.$thumbnail=s,this.parameters.thumbnail!==c){var h=e.getThumbnailType(),n=p[h]!==c?p[h]:"";d('

'+n+"

").css("background-image","url('"+e.getThumbnail()+"')").appendTo(s)}if(this.parameters.caption!==c){var r=d('');switch(this.parameters.caption.placement){case"before":r.prependTo(s);break;default:r.appendTo(s)}if(this.parameters.title!==c&&r.append('

'+e.getTitle()+"

"),this.parameters.description!==c){var o=e.getDescription();o&&r.append('

'+o+"

")}}}var a="universalclick",l="onDotClick";"mouseenter"===this.parameters.action?(a="universalenter",l="onDotHover"):this.slider.hasTouch()&&(a="n2click"),this.dots=this.scroller.find(".nextend-thumbnail-scroller-group > div").on(a,this[l].bind(this)),this.images=this.dots.find(".n2-ss-thumb-image")},t.prototype.onTap=function(t){i||(d(t.target).trigger("n2click"),i=!0,setTimeout(function(){i=!1},500))},t.prototype.onBeforeShow=function(){var t=!1;switch(this.parameters.area){case 5:t="left";break;case 8:t="right"}t&&(this.offset=parseFloat(this.$widget.data("offset")),this.slider.responsive.addHorizontalSpacingControl(t,this)),this.renderThumbnails(),this.slider.hasTouch()&&(N2Classes.EventBurrito(this.$widget.get(0),{mouse:!0,axis:"x",start:function(){this.bar.width();this._touch={start:parseInt(this.scroller.css(n2const.rtl.left)),max:0},this.getScrollerWidth()this._touch.start?this.previousPane():this.nextPane(),Math.abs(e.x)<10&&Math.abs(e.y)<10?this.onTap(t):nextend.preventClick(),delete this._touch}.bind(this)}),this.slider.parameters.controls.drag||this.$widget.on("click",this.onTap.bind(this))),this.widthPercent=this.$widget.data("width-percent"),this.thumbnailDimension={widthLocal:this.dots.width(),width:this.dots.outerWidth(!0),height:this.dots.outerHeight(!0),widthBorder:parseInt(this.dots.css("borderLeftWidth"))+parseInt(this.dots.css("borderRightWidth"))+parseInt(this.dots.css("paddingLeft"))+parseInt(this.dots.css("paddingRight")),heightBorder:parseInt(this.dots.css("borderTopWidth"))+parseInt(this.dots.css("borderBottomWidth"))+parseInt(this.dots.css("paddingTop"))+parseInt(this.dots.css("paddingBottom"))},this.thumbnailDimension.widthMargin=this.thumbnailDimension.width-this.dots.outerWidth(),this.thumbnailDimension.heightMargin=this.thumbnailDimension.height-this.dots.outerHeight(),this.imageDimension={width:this.images.outerWidth(!0),height:this.images.outerHeight(!0)},this.sideDimension=.25*this.thumbnailDimension.width,this.scroller.height(this.thumbnailDimension.height*this.ratio*this.group+"px"),this.bar.height(this.scroller.outerHeight(!0)+"px"),this.horizontalSpacing=this.bar.outerWidth()-this.bar.width(),this.slider.sliderElement.on({SlideWillChange:this.onSlideSwitch.bind(this),visibleRealSlidesChanged:this.onVisibleRealSlidesChanged.bind(this)})},t.prototype.onWidgetsReady=function(){this.activateDots(this.slider.currentSlide.index),this.slider.sliderElement.on("SliderResize",this.onSliderResize.bind(this)),this.onSliderResize()},t.prototype.filterSliderVerticalCSS=function(t){};var e=!(t.prototype.onSliderResize=function(){if(this.slider.visibleRealSlides.length){if(this.lastScrollerWidth!==this.getScrollerWidth()){var t,i=1,e=this.getScrollerWidth(),s=e-2*this.sideDimension;if((t=e/this.thumbnailDimension.width)=t&&(this.localSideDimension=.1*e,i=(s=e-2*this.localSideDimension)/(this.parameters.minimumThumbnailCount*this.thumbnailDimension.width),t=s/(this.thumbnailDimension.width*i),(t=e/(this.thumbnailDimension.width*i))e;e++)i[e].$thumbnail.addClass("n2-active")},t.prototype.resetPane=function(){this.goToDot(this.currentI)},t.prototype.previousPane=function(){this.goToDot(this.currentI-this.itemsPerPane*this.group)},t.prototype.nextPane=function(){this.goToDot(this.currentI+this.itemsPerPane*this.group)},t.prototype.getPaneByIndex=function(t){return t=Math.max(0,Math.min(this.dots.length-1,t)),this.parameters.invertGroupDirection?Math.floor(t%Math.ceil(this.dots.length/this.group)/this.itemsPerPane):Math.floor(t/this.group/this.itemsPerPane)},t.prototype.getScrollerTargetLeft=function(t){this.lastScrollerWidth=this.getScrollerWidth();var i=0;t===Math.floor((this.dots.length-1)/this.group/this.itemsPerPane)?(i=-t*this.itemsPerPane*this.thumbnailDimension.width*this.ratio,0===t?this.previous.removeClass("n2-active"):this.previous.addClass("n2-active"),this.next.removeClass("n2-active")):(0

Balance of Payments

The Balance of Payments or BoP is a statement or record of all monetary and economic transactions made between a country and the rest of the worldwithin a defined period (every quarter or year). These records include transactions made by individuals, companies and the government. Keeping a record of these transactions helps the country to monitor the flow of money and develop policies that would help in building a strong economy.

Browse more Topics under Open Economy Macroeconomics

Exchange Rate
International Experience of Exchange Rate Systems
National Income Identity for Open Economy
Trade Deficits, Savings and Investments

In a perfect scenario, the Balance of Payments (BoP) shouldbe zero. That is, the money coming in and the money going out should balance out. But that doesn’t happen in most cases. A country’s BoP statement correctly indicates whether the country has a surplus or a deficit of funds. A BoP surplus indicates that a country’s exports are more than its imports. A BoP deficit, on the other hand, indicates that a country’s imports are more than exports. Both scenarios have short-term and long-term effects on the country’s economy.

Components of BoP

Now let’s understand the different components of the BoP. The BoP consists of three main components—current account, capital account, and financial account. As mentioned earlier, the BoP should be zero. The current account must balance with the combined capital and financial accounts.

Explore more under Balance of Payments

Open-Economy Macroeconomics

Trade Deficit, Savings, and Investments
International Experience of Exchange Rate Systems
National Income Identity for Open Economy
Exchange Rate

Current Account

The current account monitors the flow of funds from goods and services trade (import and export) between countries. Now this includes money received or spent on manufactured goods and raw materials. It also includes revenue from tourism, transportation receipts, revenue from specialized services (medicine, law, engineering), and royalties from patents and copyrights. In addition, the current account includes revenue from stocks.

Capital Account

The capital account monitors the flow of international capital transactions. These transactions include the purchase or disposal of non-financial assets (for example, land) and non-produced assets. The capital account also includes money received from debt-forgiveness and gift taxes. In addition, the capital account records the flow of the financial assets by migrants leaving or entering a country and the transfer, sale, or purchase of fixed assets.

Financial Account

The financial account monitors the flow of funds pertaining to investments in businesses, real estate, and stocks. It also includes government-owned assets such as gold and Special Drawing Rights (SDRs) held with the International Monetary Fund (IMF). In addition, it includes foreign investments and assets held abroad by nationals. Similarly, the financial account includes a record of the assets owned by foreign nationals.

Why is BoP important?

The BoP statement provides a clear picture of the economic relations between different countries. It is an integral aspect of international financial management.Now that you have understood BoP and its components, let’s look at why it is important.

To begin with, the BoP statement provides information pertaining to the demand and supply of the country’s currency. The trade data shows a clear picture of whether the country’s currency is appreciating or depreciating in comparison with other countries. Next, the country’s BoP determines its potential as a constructive economic partner. In addition, a country’s BoP indicates its positionin international economic growth.

By studying its BoP statement and its components closely, a country would be able to identify trends that may be beneficial or harmful to the economy and take appropriate measures.

PreviousMagnetic Effects of Electric Current

NextNon-Conventional Sources of Energy

Customize your course in 30 seconds

Which class are you in?

5th

6th

7th

8th

9th

10th

11th

12th

Balance of Payments: Concepts, Components, Importance, Examples (2024)

FAQs

What is the importance and components of balance of payment? ›

The balance of payments is a record of all financial transactions countries make. There are three major parts of a balance of payments: current account, financial account and capital account. The balance of payments is important for several reasons, including financial planning and analysis.

See Details ›

What is an example of the balance of payments? ›

An example of a transaction recorded in the BOP could be in a case where Country A purchases $10 million worth of goods from Country B. The $10 million worth of goods in INFLOW to Country A is a debit and will be recorded as -$10 million.

Learn More ›

What are the three main components of the current account of the balance of payments? ›

There are three components to the current account – the 'trade balance', 'primary income balance' and 'secondary income balance'. In economic analysis or commentary, most attention is usually given to the trade balance, which records the difference between the value of our exports and imports of goods and services.

What are the stages of the balance of payments? ›

A typical classification defines four stages: (1) young and growing debtor, (2) mature debtor, (3) young creditor, and (4) mature creditor.

What are the two main components of balance of payments? ›

The two main components of a balance of payment account are:

Current account.
Capital account.

View Details ›

What are the purposes of balance of payments? ›

The purpose of balance of payments statistics is to provide a comprehensive account of the economic relations between a country and the rest of the world. They describe the trade in goods and services, the financial flows in return for these goods and services, and income received or paid abroad.

Read The Full Story ›

What are the characteristics of balance of payments? ›

Main characteristics of ' Balance of Payments ' are :1 Systematic Record - It is a record of payments and receipts of a country related to its import and export with other country. 2 Fixed Period of Time – It is an account of a fixed period of time generally a year.

Read On ›

What is an example of a balance of payments deficit? ›

The most obvious cause of a balance of payments deficit is called a "unilateral transfer." For example, U.S. residents who send money in the form of foreign aid to another country do not receive anything in return (economically speaking).

Find Out More ›

What is the balance of payments and how is it calculated? ›

Balance of Payments - Key takeaways

The trade of goods and services determines whether the country has a deficit or surplus balance of payments. Balance of Payments = Current Account + Financial Account + Capital Account + Balancing Item.

Learn More Now ›

What is balance of payment in simple words? ›

In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world.

Discover More Details ›

What is current account with example? ›

What is a Current Account? A Current Account is a non-interest-bearing bank account, mainly used to service the needs of the businesses. Current Accounts allow for more transaction limits on cash deposits and withdrawal within or outside city.

Find Out More ›

What are the four 4 components of current account balance? ›

Key Takeaways

A surplus is indicative of an economy that is a net creditor to the rest of the world. A deficit reflects a government and an economy that is a net debtor to the rest of the world. The four major components of a current account are goods, services, income, and current transfers.

What is the problem of balance of payment? ›

The problem of balance of payment arises when there is rise in the balance of payment deficit. This problem can be managed when exports start rising and imports start reducing. Policies must be created which will help in stimulating exports.

Discover More ›

What are the causes of deficit in balance of payment? ›

Causes of BoP Deficit

High outflow of foreign exchange to meet import demands like technology, machines, and equipment can lead to BoP deficit. Sustained rise in a country's prices can often make foreign products cheaper, leading to a high volume of imports. Unstable tax structures, change in government, etc.

Find Out More ›

What are the components of balance of trade and balance of payment? ›

Balance of trade (BoT) is the difference that is obtained from the export and import of goods. Balance of payments (BoP) is the difference between the inflow and outflow of foreign exchange. Transactions related to goods are included in BoT. Transactions related to transfers, goods, and services are included in BoP.

Learn More ›

Why should balance of payments be balanced? ›

IB Economics Tutor Summary: The balance of payments is always balanced due to it being a double-entry system, where every economic transaction with the world is recorded twice: as money coming in and going out. It comprises two main parts: the current account and the capital and financial account.

Learn More ›

Why is balance of trade important? ›

Balanced trade helps prevent abrupt and disruptive changes in exchange rates and trade flows. For example, consider how volatile exchange rates and dependency on foreign countries for goods may cause undue strain on one's economy. Jobs and Domestic Industries: Balanced trade may benefit both jobs and domestic industry.