Balance of Payments (BOP)

What is the Balance of Payments?

The Balance of Payments (BOP) is one such statement that shows transactions made between the company in one country and the other countries over the period of time, be it six months or a year.

Importance of Balance of Payments (BOP)

Widely known as the balance of international payments, the BOP provides a summary of transactions that an individual, company or a government body, in a specific country, complete with companies, government body, or individuals of another country.

These transaction record exporting and importing of Capital, services, and goods along with transferred payment like remittances, foreign aid, and more. Basically, the BOP divides these transactions into two different accounts – the capital account and the current account.

While the current account summarizes transactions of services, goods, current transfers, and investment Income; the capital account talks about the transactions in central Bank reserves and financial instruments.

Furthermore, the current account gets included in the evaluation of national output, and the capital account doesn’t get involved. Furthermore, the sum of every transaction that gets recorded in the BOP has to be zero, as far as the capital account is defined extensively.

The reason here is that every credit that appears in the current account has a matching debit in the capital account and vice versa. Now, suppose that a country fails to financially back up its imports via capital exports, then it would have to put in funds from the reserves, excluding the ones held with the central bank. This situation is generally known as the balance of payments deficit.

Role of Economic Policies

International investment position data and BOP are essential in creating international and national economic policy. Specific aspects of the data like foreign direct investment and payment imbalances are the primary things that the policymakers of a nation get to address.

Often, economic policies are targeted at certain objectives that affect the balance of payments. For instance, while one country may adopt such policies that help to attract foreign investment, the other country may keep its currency at a low level so as to increase exports and build currency reserves. Ultimately, the impact of all these policies gets recorded in the balance of payments.