Balance of Payment

What is Balance of Payments?

Balance of Payments (BOP) is an accounting record of all monetary
transactions between a country and the rest of the world
BOP is a record which countries use to monitor all international
monetary transactions at a specific period of time.
All trades conducted by both the private and public sectors are
accounted for in the BOP in order to determine how much money is
going in and out of a country
If a country has received money, this is known as a credit, and, if a
country has paid or given money, the transaction is counted as a
debit.
Usually, the Balance of Payments is calculated every quarter and
every calendar year.

Components of Balance of Payment

Balance of Payment is classified into three categories. These are:
The current account
It includes
Trade in goods: visible account
Trade in services: invisible account consists of transport, tourism and
insurance etc.
Net Income flows: Income flows consist of wages, interest and profits
flowing into and out of the country.
Current transfers of money: Government contributions to and
receipts from international organisations and international transfers of
money by private individuals and firms.
The Capital account
It records flow of funds, into the country (credits) and out of the
country (debits), associated with the acquisition or disposal of fixed
assets
Transfers of financial assets by migrants
The financial account

The financial account
It records the flow of money in and out of a country because of:
Investment (direct and portfolio)
Records primarily long term investments
Direct investments if a foreign company invests money from abroad in one of its
branches or associated companies a country. (Any profit from this investment will be
recorded as income outflow on the current account)
Portfolio investment- changes in the holding of paper assets, such as company shares.
E.g. If an Indonesian buys shares in an overseas company, this is an outflow of funds i.e.
Debit item
Other financial flows
It consists primarily of various types of short-term monetary movement between a
country and the rest of the world. E.g. Deposits by overseas residents in banks in the
country and loans to Indonesia from abroad are credit items.
Deposits by citizens of a country in overseas banks and loans by National banks to
overseas residents are debit items.
Short term monetary flows are common between international financial centres to take
advantage of differences in interest rates and changes in exchange rates.
Flow to and from the reserves
Every country holds reserves of gold and foreign currencies. Central bank sells some of
the reserves to purchase national currency in the foreign market. It does so in order to
support the rate of exchange. Drawing on reserves represents credit item in the balance
of payment accounts. Money drawn from the reserves represents an inflow of the BOP.
The surplus elsewhere in the balance of payments can be used to build up the reserves
i.e. debits.

Balance of Payment can be favourable
or unfavourable (deficit)
Theoretically, the BOP should be zero,
meaning that assets (credits) and liabilities
(debits) should balance. But in practice this is
rarely the case and, thus, the BOP can tell the
observer if a country has a deficit or a surplus
and from which part of the economy the
discrepancies are stemming.