Economic implications of Balance of Payment

Economic implications of Balance of Payment

Balance of payment measure the trade of any given country, with the rest of the world in a given time period, which is generally one year, but not necessarily. Talking in retrospection, Balance of payment was not such an important parameter of any country’s economic construction, but associating to the current globalist scenario of hastening growth in the 20th century, balance of payment is one of the several important factors while demonstrating the growth charts of any country of state.  This contains the trade by government bodies, of by individual firms, or any form of exchange of goods and services. Talking in terms of a layman, balance of payments records all the financial transactions which a country undertakes with rest of the world. The components of BOP are generally Imports and exports but are not limited to imports and exports, BOP also includes, financial capital, fund transfers and related things.

Balance of payments in this age presents an important statement of the country’s economic strength and viability. The feasibility and transactional value of any economy is in fact that whether it exports goods, or it imports goods. The BOP account is said to be in surplus when exports exceed imports and in deficit if the imports surpass the value of exports. Generally the consolidated figure amounts to zero, with imports and payments written as negative item, and exports and gains entered as positive items, the balance of all items must amount to zero, that is the theory. However in regular practice few anomalies arise while recording the transactions often leaving the net result slightly deviated.

The main constituents of the BOP are the current account and the capital account. The capital account records the transaction in a runtime daily basis; those transactions find a place in the current account which doesn’t gives rise to future claims in the financial year. The net change in the ownership of foreign assets is recorded in the capital account. The capital account includes the reserve account and the amounts of loans and investment given from the country to the world. Although, the amount of interests and dividend earned, or paid on those loans or investments will be recorded as a current income or expenditure in the current account.

The difference in the BOP account of an economy can arise out of several factors which can be summed up as follows

  • When the government experiences a fiscal deficit then the BOP account will also show a deficit pertaining to the less production of goods leading to higher imports.
  •  The behaviour of the consumers also marks a fluctuation in the balance of payment account, when the consumers are willing to take up a loan to afford higher consumption, BOP account will show a deficit.
  • Economic boom is also a factor which affects the balance of payment, when the purchasing power of the citizens rise, they will definitely consume more thu8s increasing the amount of import.
  • Higher Inflation also affects the BOP as it makes imports more competitive and exports a lot less competitive shifting the BOP towards a deficit.

And the reasons for a surplus in the BOP will be exactly opposite of what we have just seen.

An economy which is having a surplus in its BOP accounts is supposed to be self sufficient and independent, thus importing as less as possible. A politically sound economy will always show a positive balance in the BOP.

Economically speaking, BOP is a crucial factor while judging any country’s economy, not just in a Macroeconomic approach. But also for investors, stakeholders, Multi-National Corporations etc, all refer to the host nations BOP while analysing the feasibility of investing, or treading with.