The statement which holds all the transactions of a country’s foreign trade with other countries for a specified period of time, is called balance of payment. According to Kindleberger, “Balance of payments of a country is a systematic record of all economic transactions between it’s residents and residents of foreign countries.”
The balance of payments is a crucial economic indicator that provides insights into a country’s transactions with the rest of the world. It is a record of all international financial transactions made by a country’s residents, both individuals and businesses, over a specific period of time.
The balance of payments consists of two main components: the current account and the capital account. The current account tracks the flow of goods, services, income, and transfers between a country and the rest of the world. It includes exports and imports of goods and services, as well as income from investments and transfers like foreign aid.
Current account consist of
Capital account
Capital account includes the transfer of assets between the residents of two countries. These assets may be physical assets, financial assets, international claims from borrowings, etc. Capital account does not include the trade of goods or services, but deals in borrowings and investments. Borrowings include commercial borrowings and as for investments, it includes Foreign Direct Investment (FDI), Portfolio investment or Foreign Institutional Investment (FII), etc. Capital account also includes deposits by Non resident Indians, Short term trade credits, etc.
The balance of payments is important because it reflects a country’s economic health and its interactions with other nations. A positive balance of payments, also known as a surplus, indicates that a country is exporting more goods and services than it is importing. This can be a sign of a strong economy and competitiveness in international markets.
Conversely, a negative balance of payments, or a deficit, suggests that a country is importing more than it is exporting. This can indicate a reliance on foreign goods and services, which may have implications for domestic industries and employment.
Policy-makers and economists closely monitor the balance of payments to assess a country’s economic performance and make informed policy decisions. They analyze trends in exports, imports, and capital flows to identify areas of strength and weakness in the economy. For example, a consistently large deficit in the current account may indicate structural issues in the economy that need to be addressed.