Balance of Payment (BOP)
In international trade importing countries make payments for goods and services from other nations while exporting countries receive a receipt. Balance of Payment is the record of transactions of payment and receipts between one country and other countries of the world. The balance of payment therefore is the annual records of payment a country makes on importation and receipts received from the commodities exported. The balances of payment adopt the principles of double-entry bookkeeping in its accounting method. This means that total debit items must be offset or paid for by a debit through foreign exchange remittance.
Components of Balance of Payment
Balance of payment has three accounts
- The current account
- The capital account
- The official settlement account
1. The current account: Current account shows the flow of payment and receipts for goods and services and transfer payment. It consists of transactions which occur regularly. It deals with payment for currently produced goods and services. It also shows income and expenditure both on visible imports and exports, payment on banking, shipping, insurance, and other services.
2. The capital account: This is the account that shows the capital movement in form of investment and loans. It is the account that shows an actual transfer of money from one country to another e.g. Net investment abroad, short-term loans, long-term leading, borrowing, and reserves. It also records errors and omissions.
3. The official settlement account: This is the account that shows the change in its cash and the change in its official reserve assets during the year.
Balance of Payment Disequilibrium
A balance of payment disequilibrium exists if the total receipt of a reporting country on the combined current and capital account is not equal to the total payment made to all other countries, during a given period, usually a year.
Balance of payment disequilibrium could be deficit or surplus.
1. Surplus Balance of Payment
Surplus Bop occurs when the annual total receipt of a country is more than payments.
2. Deficit Balance of Payment
Deficit BOP occurs when the annual total receipt of a country is less than a payment.
Effects of Surplus Balance of Payment
1. Increase the nations external reserve
2. Attract foreign investors
3. It indicates improvement in the well being of a nation
4. Encourages economic growth and development
5. It makes a nation to be a force to be reckoned with among countries because she will be classified among the rich nations.
Distinguish between the following
i. Visible import and visible exports
ii. The current account and capital account
iii Surplus balance of payment and Deficit balance of paymentView Answer