Introduction

Balance of payment (BOP) summarises a country’s economic dealings with the rest of the world during a given period. In general, a country’s BOP is computed quarterly in each financial year. BOP for short is also known as the balance of international payments that encompasses all of a country’s commercial dealings with non-residents. It includes services, liabilities, financial claims, products, revenue, and transfers of any type of good such as gifts. The Balance of Payment accounts for all business transactions, whether handled by the private or public sector, to determine the amount of money flowing out and coming into the country (Feldstein, 2007). When money enters the country, it is referred to as credit. On the other hand, when money is sent by anyone outside the country, it is referred to as a debit. In this context, this paper describes Balance of Payment in the term of the different financial accounts of a nation.

Breaking Down of the Balance of Payment

Followings are three important parts of the “Balance of Payment” of a country that is:

Current Account: The current account is used to track the inflow and outflow of commodities and services into a country. Any sort of investment earnings, both private and public, are also accounted for in the current account. The current account records the credits and debits on transactions involving things such as raw materials and manufactured commodities that are bought, sold, or given away to another country in the term of aid. The nation’s balance of trade is made up of a mix of products and services. The BOT that is the maximum sum of a country’s BOP is mainly calculated by adding the total of exports and imports of the country (Dell and Lawrence, 2013). If a country’s BOT is in deficit, it means the country’s imports exceed its exports, and if the BOT is in surplus, it means the country’s exports exceed its imports. Any revenues from income-generating assets, such as stocks, are likewise deposited in the current account.

Unilateral Transfers are a final component of BOP that is included in the current account of the country. The salary credited in the accounts of people who work abroad and send their salaries to their families in their home country is an example of unilateral transfers. It includes all forms of foreign aid received directly by the country. The current account of a country is the most accurate indication of its economic health. A positive current account balance indicates that the country is a net lender for other countries. On the other hand, a negative current account balance indicates the net borrowing situation of a country. The surplus balance of the current account increases the net assets of a country, whereas the deficit current account balance reduces it (Frenkel and Johnson, 2013). In the context of a nation, it can be stated that the current account balance of a nation is influenced by a variety of variables. It includes the trade policy of the country, currency rate, exchange rate, forex reserves, competitiveness, and inflation rate.

Capital Account: All overseas capital transactions are included in the capital account. This account includes the disposal or acquisition of any non-financial asset such as land. This asset has not yet been produced but is required for production. Coal mining is it’s an example. The capital account can be broken down into debt forgiveness, financial assets that are gained by migrants who leave or enter a country, good’s transfer, transfer of fixed assets of ownership, inheritance taxes and gifts, uninsured fixed asset’s damage, and funds gained from the sale or land acquisition (McCombie and Thirlwall, 2016).

Changes in physical and financial ownership of a country add to the capital account. The capital account includes foreign investment, adjustments in a reserve account, and other investments. A capital account may also be defined as an account that shows a company’s net value at a certain point in time. Further, the countries capital account is used for calculating the country’s economic activity. On the other hand, money that is contributed by an investor to a company is documented in the countries ledger account, which reflects the earned amount by the firm (International Monetary Fund, 2000). Further, the balance of the capital account is represented in the company’s balance sheet in the form of owner’s equity and partner’s equity.

Financial Account:
The flows of international monetary related to corporate investment, equities, real estate, and bonds are reported in the country’s financial account. The financial account of a country also includes foreign reserves, rights of special drawing, government-owned assets like foreign reserves and gold. Foreigners’ assets are likewise documented in financial records together with their own. A financial account is a section of a country’s balance sheet that deals with non-residential claims or obligations, particularly those involving financial assets (Valdivia-Velarde and Razin, 2014). Reserve assets, Portfolio investments, direct investments, and those segmented by industry are all included in the financial account of the country.

Balance of Payment Crisis and Reasons

The term “balance of payment crisis” refers to the balance of payments of a country that is imbalanced and facing an unsustainable situation. When a substantial quantity of money leaves the country and government’s borrowing ability is reduced. This situation reflects the national crisis (Valdivia-Velarde and Razin, 2014). A crisis of BOP becomes serious when a country’s budget is unusually big, its finances have been in deficit extensively, and the country’s debt has grown beyond its capacity to handle.

Reasons for Balance of Payment Crisis

It is critical to comprehend the causes of a country’s balance of payment issue. The country’s economy is severely harmed by the balance of payment problem. An administration of a country can take action to mitigate the issue related to the balance of payment problem if they know it in a better manner. For example, the increase in the trade gap between the nations causes a trade deficit. As a result, the import of country substantial rises in the comparison of exports for a long period. This problem is mainly taking place in the oil-developing countries which need a lot of petroleum products to meet the necessities of the development activities within the country (Feldstein, 2007). The growth in oil imports causes a trade deficit. On the other hand, the fluctuation in the currency rate between nations also affects the balance of payment structure of the poor country against the economically strong country.

Conclusion

As per the above discussion, it concluded that the status of a country’s economy determines how smoothly it operates. The budget of a country is established by the country’s needs. This budget accounts for all of a country’s expenses as well as all of the cash received by the government from various sources. The scenario in which the entire financial obligations of a country equal its total assets is mainly called the balance of payment. It is described by the balance between credits and debits in the terms of the transactions between two countries. In determining a country’s balance of payments, current account, capital account, and financial account all play an effective role. When a country’s balance of payment deficit exceeds its borrowing power for an extended length of time, the country enters a balance of payment crisis. The above-described examples effectively defined the balance of crises situation in the form of imports and decreasing exports. As a result, it may be inferred that a country’s balance of payments is critical to its economy’s proper operation.

References

Dell, S. and Lawrence, R. (2013). The Balance of Payments Adjustment Process in Developing Countries: Pergamon Policy Studies on Socio-Economic Development. Elsevier.
Feldstein, M. (2007). International Capital Flows. University of Chicago Press.
Frenkel, J. and Johnson, H. (2013). The Monetary Approach to the Balance of Payments. Routledge.
International Monetary Fund (2000). Financial Derivatives: A Supplement to the Fifth Edition of the Balance of Payments Manual. International Monetary Fund.
McCombie, J. and Thirlwall, A. (2016). Economic Growth and the Balance-of-Payments Constraint. Springer.
Valdivia-Velarde, E. and Razin, T. (2014). Balance of Payments Manual. International Monetary Fund.