Balance of payment

Definition of Balance of Payment Balance of Payments (BoP) statistics systematically summaries the economic transactions of an economy with the rest of the World for a specific period. Balance of payments (BoP) accounts are an accounting record of all monetary transactions between a country and the rest of the world

These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers.goodsservicesfinancial capitalfinancial transfers The BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned.

Structure of BoP Balance of payment (BoP) comprises of current account, capital account, errors and omissions and changes in foreign exchange reserves. Under current account of the BoP, transactions are classified into merchandise (exports and imports) and invisibles.

Measuring the current account The current account of the balance of payments comprises the balance of trade in goods and services plus net investment incomes from overseas assets and net transfers Net investment income comes from interest payments, profits and dividends from external assets located outsideprofits Transfers into and out of a country include foreign aid payments

Factors which cause a current account deficit in the balance of payments There are various factors which could cause a current account deficit: 1. Fixed Exchange Rate If the currency is overvalued, imports will be cheaper and therefore there will be a higher Q of imports. Exports will become uncompetitive and therefore there will be a fall in the quantity of exports. 2. Economic Growth If there is an increase in national income, people will tend to have more disposable income to consume goods. If domestic producers can not meet the domestic demand, consumers will have to import goods from abroad. 3. Decline in Competitiveness. For example, In the UK there has been a decline in the exporting manufacturing sector, because it has struggled to compete with developing countries in the far east. This has led to a persistent deficit in the balance of trade.

Higher inflation This makes exports less competitive and imports more competitive. However this factor may be offset by a decline in the value of sterling. Recession in other countries. If the country’s main trading partners experience negative economic growth then they will buy less of our exports, worsening the current account. Borrowing money If countries are borrowing money to invest e.g third world countries