Balance of Payment Class 12 | Structure | Deficit | Types | Chapter 12 |

Balance of Payment Class 12 | Structure | Deficit | Types | Chapter 12 | Economics | 

What is Balance of Payment (BOP)?

The Balance of Payment (BOP) is a record which is systematic in nature and records all economic transactions between the resident of a country and the resident of foreign country. The resident can be any individual, firm and the government of any country. It gives a brief description of the value of all the transactions which take place within a year.

Structure of Balance of Payment (BOP)

Under BOP account, transactions are recorded in the double-entry which means that each international transaction will result in debit and credit entry of equal amount on both side. Due to double entry system, the balance at the last year of BOP account must match i.e. the total of debit column should be the same as of the column of credit side by which all the omissions and errors in the account can be rectified.

Transaction under BOP are categorized into five main categories;

1. Goods and Service.
2. Long term Capital Account.
3. Short term Private Capital Account.
4. Short term Official Capital Account.
5. Unilateral Transfer Account.

The table below will help to understand better:

Disequilibrium in BOP and Deficit BOP

There are many factors which makes BOP in disequilibrium by surplus or by deficit. The causes are as follows:

1. Economic Factor: Development on large basis causes more imports and fluctuations in businesses like increase in the price of domestic product or cheaper product in foreign.
2. Political Factor: Instability in political factors of a country may lead to flow of foreign capital in the country.
3. Social Factor: Change in trend or taste and preference in a country may also lead to increase in imports.

Deficit BOP occurs when total outflows of autonomous transaction lacks with the total inflows of autonomous transactions.

Current Account and Capital Account

Current account is that account which records all the transactions of import and export of goods and services and unilateral transactions between the resident of a country and the resident of a foreign country.

The components of current account are as follows:

• Import and Export of Goods: It is also known as Merchandise transaction or visible trade. Payment of import of goods is recorded on debit side (negative) whereas receipts from export of goods is recorded on credit side (positive). Balance of import and export of goods is known as balance of trade.
• Import and Export of Services: It is also known as invisible trade. It is of three types, namely; Shipping, insurance, banking. Payment of import of services is recorded on debit side (negative) whereas receipts from export of services is recorded on credit side (positive).
• Unilateral Transactions: It is also known as unrequested transactions or one sided transactions. Unilateral transactions to other foreign countries are recorded on debit side (negative) and unilateral transactions from other countries are recorded on credit side (positive).
• Income to or from Rest of the World: Income from rest of the world is recorded on the credit side (positive) whereas income to rest of the world is recorded on debit side (negative).

Capital account records all those transactions which leads to change in the value of asset and liabilities of a country between the resident of a country and the resident of a foreign country.

The Components of capital account are as follows:

• Loans: All the borrowing and lending of money from other countries or to other countries which leads to change in the value of assets or liabilities.

The transactions which are affected due to the non-government entities, individual, businesses are called as private transactions. Borrowing by private sector or repayment of loan by any individual or businesses is recorded on the credit side (positive) whereas loans granted to foreign resident are recorded on the debit side (negative).

The transactions which are affected due to some government entity are called as official transactions. Borrowing by public sector or repayment of loan by any government sector of foreign are recorded on the credit side (positive) whereas loans granted to foreign government are recorded on the debit side (negative).

• Foreign Investment: All types of investment which is done by foreigners in our Indian companies, real estate etc. are recorded on the credit side (positive) whereas all types of investment which is done by Indian individuals, companies etc. in the foreign companies, real estate (outside India) etc. are recorded on the debit side (negative).

There are two types of transactions which are as follows:

Foreign Direct Investment (FDI): It is the transaction in which the purchaser has a direct control on the purchased assets in the rest of the world.

Foreign Institutional Investment (FII): It is a part of portfolio investment. It is that type of transaction in which the purchaser does not have a direct control or does not have control on the purchased asset in the rest of the world.  

• Change of Forex reserve: It is a type of Government’s financial asset which is held by central bank of a country. The withdrawal of these reserves are recorded on the credit side (positive) whereas adding in these reserves are recorded on the debit side (negative).

NOTE: Change in reserves is recorded is not recorded in the reserve but in the BOP account.

Types of Balances

The BOP account records three type of balances which are as follows:

• Balance of Trade: Balance of trade is the difference between the value of import and export of goods done during a year.

Balance of Trade = Export of Goods – Import of Goods

• Balance of Current Account: Balance of current account is the difference between the value which is credited and debited in the current account in BOP account.

Balance of Current Account = Sum Credited to Current Account – Sum Debited to Current Account

• Balance of Capital Account: Balance of capital account is the difference between the value which is credited and debited in the capital account in BOP account.

Balance of Capital Account = Sum Credited to Capital Account – Sum Debited to Capital Account

Differences

• Autonomous Items and Accommodating Items

Kindly refer to the following chapters for better understanding and higher scores in Class 12 Economics Exam.

Do share this post if you liked Balance of Payment Class 12. For more updates, subscribe to our website BrainyLads