Balance of Payments (BOP)

What is the Balance of Payments (BOP) ?

If you want to monitor the cash coming in and out of a company, then you have to check the company’s account book. Similarly, if we want to know about the flow of cash in the country then, we have to check the account balance of the country’s balance of payment. There are two parts of the balance of payment Current Account and Capital Account. According to the IMF, there are three components of the balance of payments Current Account , Capital Account and Financial Account.

At the international level all countries export and import goods with each other country, exchange services and also do cash transaction. In this way after a certain period , if the account of transaction is taken on all these items , then one country receives payment from the other country and the other country is left to pay the payment of a third country. The balance of payments is the annual record of all international trade and financial transaction made by a country’s residents.

Components of Balance of Payments

Current Account :- This account contains details of import and export, details of income from abroad , amount of interest given to Indian investors , foreign direct investment (FDI) / interest received from FDI, money sent to families by NRI.

Capital Account :- In this account details of direct investment received from other countries such as FDI, ADR are done. Lend money from other countries and financial assistance etc.

If an American invests in India via FDI, FII, IDR etc, so we will put this in credit column.

If an Indian invests in the US via FDI, FII, ADR etc. So we will put this in debit column.

Through the balance of payment, we keep an eye on the flow of capital. Ideally, both the current account and the capital account in the balance of payments should be equal.

Some important topics about Balance of Payments

(i) Balance of payments is maintained by the Central bank of every country.

(ii) Citizenship does not matter in it , but the country in which the person lives , it matters.

(iii) If a US citizen is living in India, he will be treated as resident of India in respect of balance of payments.

(iv) The money that is coming in the country , by writing it in the column of credit.

(v) On the other hand the money which is going out from the country by writing it in the column of debit.

(vi) The balance of payments of a country should be zero.

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