Balance of Payment (BOP)
Balance of payment is the sum of all transactions that take place between its residents and the residents of all foreign countries in the world. It is a comprehensive record of all economic transactions of the residents of a country with the rest of the world during a given period of time. It includes the transaction of visible as well as invisible items. Invisibles items are those goods and services which are not recorded in the custom barriers.
Therefore, it covers all transactions which include export and import of goods and services, tourists’ expenditure, interest and dividends received or paid abroad and purchase and sales of financial or real assets abroad. Since it includes all the amount of export and import of visible as well as invisible goods and services, it is a broad concept in comparison to balance of trade. So it is taken as an important index to summarize the statement of all international receipts and payments. It reflects the economic position of the country.
There are three possibilities in Balance of Payments. They are as follows .
- Surplus in BOP
- Deficit in BOP
- Balanced in BOP .
As it adopts double entry book keeping system, it has two sides –credit side and debit side.
- All payments to be received from abroad are recorded on the debit side and
- all payments to be made to the foreigners are included on the credit side.
- In that condition, if the value of payments and value of receipts made for all visible and invisible transaction are equal, it is called balanced balance of payment or equilibrium balance of payment.
- if receipts are greater than payments, it is known as surplus or favorable balance of payment and
- when receipts are less than payments it is deficit balance of payment, which is harmful for a country for its economic development.
Balance of payment is a record or overall statement of all economic transactions of a country with the rest of the world during a year.