What's Hot

    Banks cannot perennially rely on RBI money to support credit offtake: Das

    August 5, 2022

    Economy is an island of macroeconomic and financial stability, says RBI Governor Shaktikanta Das

    August 5, 2022

    RBI’s MPC increases policy rate by 50 bps to counter inflation

    August 5, 2022
    Facebook Twitter Instagram
    Facebook Twitter Instagram
    Invest PolicyInvest Policy
    Subscribe
    • Banking
    • Economy
    • Finance
    • Insurance
      • LIC
    • Investment
    • Market
    • Money
    • MF
    • More
      • Scheme
      • Property
    Invest PolicyInvest Policy
    Home Concept, components and importance of balance of payments
    Economy

    Concept, components and importance of balance of payments

    InvestPolicyBy InvestPolicyJanuary 23, 2020Updated:November 26, 2021No Comments4 Mins Read
    Facebook Twitter LinkedIn Telegram Pinterest Tumblr Reddit WhatsApp Email
    balance of payments
    Share
    Facebook Twitter LinkedIn Pinterest Email

    When assessing a country’s economy, foreign exchange, cash flow, etc., a lot of factors are considered. One such component is the balance of payments, which plays an important role in assessing a country’s economy. So through this article, we are going to give you important information about this.

    What is the balance of payment?

    Balance of payments can be defined as the record of all monetary transactions between a country’s residents and other countries within a certain period of time. The details of transactions made by companies, individuals and the government are contained in the Balance of Payments statement. These are official records that help analysts monitor the flow of funds and analyze economic policies. The balance of payments plays an important role in determining the inflow and outflow of cash in the economy. Simply put, the balance of payments is the account of financial transactions between a country and other countries.

    Balance of payment formula

    The balance of payments is calculated using the following method –

    Balance of Payments = Current Account Balance + Capital Account Balance + Reserve Balance

    Balance of Payments (BOP) = (XM) + (CI – CO) + Forex

    Here, X exports, M imports, CI capital inflows, CO capital inflows and forex means foreign currency reserve balance.

    Importance of balance of payments

    Balance of payment provides important data. There is a record of inward and outward flow of cash within an economy. This data plays an important role in monitoring the flow of funds for the development of the economy. There are several reasons why the balance of payments is important for an economy, some of which are –

    • It gives a picture of the financial and economic situation of the country. It is used to understand the economic relations of different countries. For this reason, it is considered an important part of international financial management.
    • The balance of payments is issued as a statement on a quarterly basis. These statements are used to determine the performance of the currency. At the same time, it shows that the currency has been devalued, increased or stabilized. The balance of payments thus shows how a country’s currency is performing compared to other currencies.
    • The government uses balance of payments statements to understand economic trends and develop efficient fiscal and trade policies.
    • Economists and analysts use this information to understand a country’s economic behavior with foreign nations. It helps in taking appropriate steps in those cases which are likely to harm the economy of the country or which are causing damage.
    • Along with this, the balance of payments helps in evaluating the potential of a country as a good economic partner. It also indicates the contribution made by a country to international economic development.

    Types of the balance of payments

    Balance of payments refers to the difference between “export – import”. The trade balance has to be included as an important part when calculating the balance of payments. The balance of payments is divided into two categories, which are as follows –

    Favorable balance of payment

    A favorable balance of payment is a scenario in which the value of total goods and services exported exceeds the value of total goods and services imported. This situation is considered good for the country.

    Adverse balance of payments

    When the value of total services and goods imported into a country exceeds the value of total services and goods exported, it is called the adverse balance of payments. It is not considered good for the economy of the country.

    Components of balance of payments

    The three components of the balance of payments are given below. An ideal economy requires a current account to balance the amount of financial and capital accounts. However, this is not the case in most cases. The balance of payments refers to the shortage or surplus of the fund.

    Current account

    The current account records and monitors the inflow and outflow of money from the trade in goods and services. Such accounts keep records of funds spent and received from tourism and services sector in revenue, manufacture of goods, transportation of raw materials, etc. Revenue and copyrights generated from stock and royalties are also recorded under current account.

    Capital account

    The country’s capital account keeps a record of and monitors cash flows from international capital transactions. These are transactions that occur through the purchase or disposal of non-financial and non-produced assets. Money received from the gift and loan waiver is also recorded in the capital account.

    Financial account

    The financial account monitors the flow of funds from businesses, real estate, shares, gold and government-owned assets. The financial account also keeps records of assets owned by foreign nationals in India, foreign investment and property owned by Indian citizens abroad.

    Share. Facebook Twitter Pinterest LinkedIn Tumblr Telegram Email
    Previous ArticleWhich Credit or Debit Card To Use?
    Next Article Which is better between SIP and Lump sum?
    InvestPolicy

    Related Posts

    Economy is an island of macroeconomic and financial stability, says RBI Governor Shaktikanta Das

    August 5, 2022

    Is the declining rupee a crisis or an opportunity?

    August 5, 2022

    Exports slowdown has begun, warns Nomura

    August 3, 2022
    Add A Comment

    Leave A Reply Cancel Reply

    Top Posts

    The upper circuit in the stock of Route Mobile and Affle India, shares of both companies reached all-time high, know the reason

    February 11, 2021

    Income Tax: Salary arrears has increased the tax burden? You can get relief under section 89, understand the calculation

    May 21, 2022

    LIC: You can start the discontinued policy again, LIC is giving discount – know how

    August 24, 2021
    Advertisement

    Our main motto is to help our customers in making personal finance decisions easy and convenient as per their comfort. We are committed to provide accurate and unbiased information at your doorstep and keep it transparent among our customers.

    We're social. Connect with us:

    Facebook Twitter YouTube LinkedIn
    Top Insights

    Banks cannot perennially rely on RBI money to support credit offtake: Das

    August 5, 2022

    Economy is an island of macroeconomic and financial stability, says RBI Governor Shaktikanta Das

    August 5, 2022

    RBI’s MPC increases policy rate by 50 bps to counter inflation

    August 5, 2022
    Must Read

    What is UTR Number in Phonepe and Google Pay? how to check

    March 1, 2022

    About 100 agro-product companies under CBI scanner for bank fraud

    July 31, 2022

    Is the declining rupee a crisis or an opportunity?

    August 5, 2022
    © 2022 Invest Policy.
    • About Us
    • Contact Us
    • Advertise
    • Privacy Policy

    Type above and press Enter to search. Press Esc to cancel.