BALANCE OF PAYMENTS
BoP of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period, usually one year.
Why there is a need to calculate BoP
- Reveals the financial and economic status of a country.
- Can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.
- Helps the Government to decide on fiscal and trade policies.
- Provides important information to analyze and understand the economic dealings of a country with other countries.
- Can help in knowing the trend of the economy.
- Knows about the exports and imports of the economy.
BoP transaction are grouped under
Current Account: It shows export and import of visibles (also called merchandise or goods - represent trade balance) and invisibles (also called non-merchandise).
Invisibles include services, transfers and income.
Capital Account: It shows a capital expenditure and income for a country. It gives a summary of the net flow of both private and public investment into an economy.External Commercial Borrowing (ECB), Foreign Direct Investment, Foreign Portfolio Investment, etc form a part of capital account.
Errors and Omissions: Sometimes the balance of payments does not balance. This imbalance is shown in the BoP as errors and omissions. It reflects the country’s inability to record all international transactions accurately.
Changes in Foreign Exchange Reserves: Movements in the reserves comprises changes in the foreign currency assets held by the Reserve Bank of India (RBI) and also in Special Drawing Rights balances.
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