Balance of payment

The balance of payments, also known as balance of international payments and abbreviated B.O.P., of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period (over a quarter of a year or more commonly over a year). These transactions are made by individuals, firms and government bodies. Thus the balance of payments includes all external visible and non-visible transactions of a country. It is an important issue to be studied, especially in international financial management field, for a few reasons. First, the balance of payments provides detailed information concerning the demand and supply of a country's currency. For example, if the United States imports more than it exports, then this means that the supply of dollars is likely to exceed the demand in the foreign exchanging market, ceteris paribus. One can thus infer that the U.S. dollar would be under pressure to depreciate against other currencies. On the other hand, if the United States exports more than it imports, then the dollar would be likely to appreciate. Second, a country's balance-of-payment data may signal its potential as a business partner for the rest of the world. If a country is grappling with a major balance-of-payment difficulty, it may not be able to expand imports from the outside world. Instead, the country may be tempted to impose measures to restrict imports and discourage capital outflows in order to improve the balance-of-payment situation. On the other hand, a country experiencing a significant balance-of payment surplus would be more likely to expand imports, offering marketing opportunities for foreign enterprises, and less likely to impose foreign exchange restrictions. Third, balance-of-payments data can be used to evaluate the performance of the country in international economic competition. Suppose a country is experiencing trade deficits year after year. This trade data may then signal that the country's domestic industries lack international competitiveness. To interpret balance-of-payments data properly, it is necessary to understand how the balance of payments account is constructed. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. It is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.

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