Balance of Payments: Meaning, Definitions, Characteristics and Uses
Contents
Balance of Payments: Meaning, Definitions, Characteristics and Uses
What is meant of Balance of Payments ? What are the main items of Balance of Payments ?
Meaning and Definitions of Balance of Payments
Balance of trade (BOP) refers to the value of imports and export of commodities. However, the balance of payments is more comprehensive in scope and it refers to the total debits and credits.
According BO Sodersten, “The balance of payments is merely a way of listing receipt and payments in international transactions for a country.”
According to Haberler the term ‘balance of payments is used in the sense of the whole demand and supply situation, and it is in this sense that the concept of the balance of payments is mostly used in international trade discussion.”
According to James Ingram, “The balance of payments is a summary record of all economic transactions between residents of one out individuals, fires and government agencies) and the rest of the world during given period of time.
According to Walter Krause, The balance of payments of a country is a systematic record of all economic transactions completed between its residents and residents of the rest of the world during a given period of time, usually a year.”
According to Ellsworth, “This is a summary statement of all the transactions between the residents of one country and the rest of the world. It covers a given period of time, usually a year.”
According to Snider, “Balance of payments may be defined as a summary of the money value of all exchanges and transfer of goods services and evidences of debt or ownership-appropriately classified between the residents, businesses and government and other institutions of our country and rest of the world for a given period of time.”
According to Benham, “Balance of payments of a country is a record of its monetary transactions over a period with the rest of the world.”
According to Kindleberger, “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 of time.”
According to International Monetary Fund, “The balance of payments for a given period is defined as a systematic record of all economic transactions during the period between residents of the reporting countries.”
According to US Department of Commerce, “The balance of payments of a country consists of the payments made, within stated period of time between the residents of that country and the residents of foreign countries. It may be defined in a statistical sense as an itemised account of transactions involving receipts from foreigners on the one hand and payments to foreigners on the other. Since the former relate to the international income of a country, they are called “credits”, and since the latter relate to the international outgo, they are called “debits.”
Characteristics of Balance of Payment
These are as under:
1. Systematic Record of Economic Transactions – BOP is a systematic record of a country’s monetary transaction over a period with the rest of the world.
2. A Summary Statement – BOP is a summary statement of all transactions between the residents of one country and rest of the world.
3. For a Given Period of Time – Bop covers a given period of time, usually a year.
4. Other Characteristics – In addition to above following are also characteristics of BOP :
(i) Relations between receipts and payments.
(ii) Use of residents in comprehensive sense.
(iii) BOP is always balances.
Main Items of the Balance of Payments
The classification of the debit and credit sides of the balance of payment had been given by Prof. R. F. Harrod in his book International Economics.
| Credit | Debit |
1. Exportation of goods and services:
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1. Importation of goods and services :
|
2.
|
2.
|
| 3. Gifts including indemnity payments made by outer world. | 3. Gifts including indemnity payments made to outer world. |
4.
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4.
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Form of Balance of Payment
| Item | Recepits (+) | Payments (-) | Balance |
|
|||
| Total |
Parts of Balance of Payment
It has two part – 1. Current account, and 2. Capital account.
Current Account – It has two parts.
Capital Account – Capital account has all long-term transactions.
It has three main parts : (1) Private capital account, (2) Banking capital account and (3) Official capital account.
Private capital account is sub-divided into (a) Long-term and (b) Short-term transactions.
The overall balance is effected by net position of trade and invisibles on current account net flow of external assistance, net commercial borrowings, NR deposits, net position of foreign investments and other flows.
Significance / Uses of Balance of Payment
Importance of BOP can be understand through the following points :
1. Economic condition of the country can be examined.
2. Requirement of foreign assistance can be known.
3. International relation can be estimated through the BOP.
4. BOP is helpful for the knowledge of country’s currency and foreign exchange position.
5. It is helpful in solving economic problems.
6. BOP is helpful in formulating appropriate economic policies for the nation.
7. It provides knowledge of country’s currency and foreign exchange position.
8. The effect of devaluation on foreign trade can be known.
9. It provides knowledge regarding current and capital account.
10. International solvency of the nation can be known.
Thus it can be concluded that balance of payment is barometer of economic position. According to Jevons, “What the periodic table of elements for chemist, the BOP is to the international economist”.
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- Foreign Exchange: Concept, Example and Needs
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