Balance of Payment (What is Balance of Payment)

Posted on Mar 21 2016 - 6:36am by Preeti

Balance of Payment

 

Meaning

Balance of payments refers to the recording of all economic transactions of a given country with rest of the world.Each country has got to enter into economic transactions with other countries of the world.As a result of such transactions,it receives payments to other countries.Balance of Payments is a statement of accounts of these receipts and payments.

Ordinarily a country has to deal with other country in respect of three items:

  1. Visible Items

It includes all kind of physical goods imported and exported.

  1. Invisible Items

It includes all kind of import export services.

  1. Capital Transfers

These are concerned with capital receipts and capital payments like investment by foreigners in India.

Like an ordinary trader,each country has to work out a balance in respect of its dealing,in all the above three items,with other countries of the world in a given period.Thus it comes to know how much it has to pay to other countries and how much it has to receive from other countries and what is the position of overall balance.

Definition

Acc. to Kindleberger

“The balance of payments of a country is a systematic record of all economic transactions between its residents and residents of foreign countries.”

In words of Benham

“Balance of payments of a country is record of the monetary transactions over a period of time with the rest of the world”.

Features of Balance of Payments

1. Systematic Record

It is a systematic record of receipts and payments of a country with other countries.

2. Fixed Period of Time

It is a statement of account pertaining to a give period of time,usually one year.

3. Comprehensiveness

It includes all the three items i.e. visible,invisible and capital transfers

4. Double entry System

Receipts and payments are recorded on the basis of double entry system.

5. Adjustment of Differences

Whenever there is difference in actual total receipts and payments,need for necessary adjustment is felt.In case of unfavorable balance of payments,government will have to take foreign loans or to promote foreign investment,so as to meet the difference in balance of payments.

6. All Items-Government and Non-Government.

Structure/forms of balance of payments

Balance of payments has three forms:

  1. Current account
  2. Capital account
  3. Overall balance of payments
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