Essay of Balance of Payment

Balance of payment can be called as the accounting transactions which are recorded in order to find out financial obligations between a country and rest of the world. The transactions which are recorded belong to the goods and services which have been either imported or exported from the country. Balance of payment accounts are always prepared for some particular period of time which takes into account various transactions related with a country with outside world and also these transactions needs to be recorder in the domestic currency of the country itself. In similar way to balance sheet it is prepared and divides into two main parts which are sources of funds which are export receipt and loans and investment receipt for a country. Other side of balance of payment is known as utilisation of funds which shows the liability side of country and the payment which a country have to make for exports and other investment outside home country.   

Hence in balance of payment sheet there has to be complete match between sources of funds and their utilisation. If some country would be having imports exceeding from their export receipt then they should be counter balanced by the income generated through foreign income or through utilisation of the national reserves hence both side should counter balance each other like a balance sheet of the country. Though the total of the balance of payment should be equivalent at both the side but individual components of the balance of payments can be unequal.

1.2 Components of BOP

Balance of payment is having three major parts which include all the inward payment known as credit to country and outwards which are known as debit to the country. The three major components of balance of payment are as follows:

1.      Current account: Current account maintains the record of all the transactions done by a country in terms of goods and services of that country with outside countries. The receipts from the export of the services and goods are maintained at one side of the account and obligation in term of due payment to be recorded on other side of the account. Ideally for any country receipts made from the exports of goods and services should exceed from the due payment for the goods and services. But many a times there is mismatch in the receipt and payments which are balances with the help of other parts of the balance of payment account such as capital account and official adjustments.      

2.      Capital account: Capital account is maintained for the money which is not related directly with the goods and services imported and exported from a country. Capital account maintains the record of financial transactions which have been made for financing and investment transactions. It includes both inward investment as well as outward investment done by a country. Hence all the current account imbalances are mainly set off by the capital account entries for a country.   

3.      Official adjustments: Official adjustments are called to be as the transactions which affect the reserves position of a country. When the current account and capital account entries are not able to set off the effects then official adjustments are made to equalise the balance of payment sheet and national reserves of the country got affected. If a country is having more amount of net of export and inward investment in a country then the imports and outward investment then the national reserves of the county will increase and if net of exports and outward investment are negative then the national reserve will decrease by the same amount in order to equalise the effect.