Balance of trade and 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.
The balance of trade is the difference between a country's exports and imports of goods, while the balance of payments is a record of all international economic transactions made by a country's residents, including trade in goods and services, as well as financial capital and financial transfers.
One example is 'trade credit' where an importer purchases goods from overseas and does not pay for the goods until they are received. Another example is 'currency and deposits', where money is deposited in or withdrawn from banks across borders, or banknotes and coins are transferred between countries.
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.
A trade deficit occurs when there is a negative net amount or negative balance in an international transaction account. The balance of payments (international transaction accounts) records all economic transactions between residents and non-residents where a change in ownership occurs.
The balance of trade (BOT), also known as the trade balance, refers to the difference between the monetary value of a country's imports and exports over a given time period. A positive trade balance indicates a trade surplus while a negative trade balance indicates a trade deficit.
country by recording all the monetary & economic transaction made between a country & with rest of the world. Some of the factors which affect Balance of Payment are Gold price, Crude oil price, Inflation rate, USDINR exchange rate which widely affect India's Balance of Payment.
Importance of Balance of Payment
The BOP is important for the following reasons: Economic Health: BOP helps gauge a country's financial health, identifying trends that could impact its economic stability. Trade Policy: It informs trade policies and strategies, helping governments make informed decisions.
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.
Structure of Balance of Payment. The monetary transactions that happen between a resident of the country and the rest of the world are recorded. These are recorded in a statement called the balance of payment. Structure of balance of payments includes current account, capital account, etc.
What are the 3 components of the balance of payment?
There are three main components of the BOP: the financial account, the capital account, and the current account. The combination of the first two should balance with the third, but that doesn't always happen.
Therefore, BoP is used to determine whether the country is having surplus or deficit and the sections that cause this surplus or deficit. BoP surplus means that exports are more than imports. In contrast, a BoP deficit indicates that imports are more than exports. This article was about the balance of payments formula.
Conclusion. The balance of payments in economics provides a snapshot of a country's economic health and momentum. A consistent current account deficit indicates the country relies on foreign capital inflows, while a surplus means it exports savings to the world.
The components of the balance of payments are often also referred to as the different types of balance of payments. They are the current account, the capital account, and the financial account.
The formula for the balance of payments is a summation of the current account, the capital account, and the financial account balances. The term balance of payments refers to recording all payments and obligations of imports from foreign countries vis-à-vis all payments and obligations of exports to foreign countries.
Balance of Payment is the record of statements of economic transactions of a country with the rest of the world. In this way, it records the inflow of foreign exchange into the country and the outflow of foreign exchange from the country and thereby, reflects the demand for foreign exchange as against its supply.
A balance of payments deficit may cause a loss of confidence by foreign investors. Therefore, there is a risk, which may cause investors to remove investments causing a huge fall in value of the country's currency.
A disequilibrium in the balance of payment means its condition of Surplus Or deficit. A Surplus in the BOP occurs when Total Receipts exceeds Total Payments. Thus, BOP= CREDIT>DEBIT. A Deficit in the BOP occurs when Total Payments exceeds Total Receipts.
If balance of payments is favourable, the Government will take liberal view of imports otherwise different types of restrictions (tariff and non-tariff measures) will be imposed as corrective measures. It will naturally affect the International Trade.
A logical measure would be a depreciation of the currency to permit the balance of payments to become balanced without excessive application of restrictions or deflationary policies. An alternative would be an increase in import duties.
How is balance of payment affected?
When aggregate demand for imports increases, exports fall. An increase in imports above the value of exports (imports > exports) affects the balance of payments. This should consequently, all other things being equal, depreciate the domestic country's currency.
The four major components of a current account are goods, services, income, and current transfers.
The transactions involving export and import of goods, i.e. only the visible items of economic transactions, determine the Balance of Trade. Balance of Trade is in surplus, when the value of export of goods are more than the value of import of goods.
The BoP is based on the principle of double-entry bookkeeping, meaning that every transaction is recorded twice - once as a credit (inflow) and once as a debit (outflow). This ensures that the sum of all transactions, or the balance of payments, is always zero.
This means the inflows and outflows of funds should balance out. However, this does not ideally happen in most cases. A BOP statement of a country indicates whether the country has a surplus or a deficit of funds, i.e. when a country's export is more than its import, its BOP is said to be in surplus.