Balance of Payments: Meaning, Components Types & Disequilibrium (2024)

FAQs

What is the meaning and components of balance of payment? ›

The balance of payments (BOP) is the method by which countries measure all of the international monetary transactions within a certain period. The BOP consists of three main accounts: the current account, the capital account, and the financial account.

A disequilibrium in the balance of payment means its condition of Surplus Or deficit. A Surplus in the BOP occurs when Total Receipts exceeds Total Payments.

Outflows from a country are recorded as debits in the BOP. For example, say Japan exports 100 cars to the U.S. Japan books the export of the 100 cars as a debit in the BOP, while the U.S. books the imports as a credit in the BOP.

The current account can be divided into four components: trade, net income, direct transfers of capital, and asset income. 1. Trade: Trade in goods and services is the largest component of the current account. A trade deficit alone can be enough to create a current account deficit.

There are several types of disequilibrium. Three common types are cyclical, secular, and structural. The business cycle and fluctuations between distinct trade cycles cause cyclical disequilibrium.

Disequilibrium refers to unsteadiness, imbalance, or loss of equilibrium that is often accompanied by spatial disorientation. The feeling of disequilibrium without the spinning sensation is sometimes related to the inner ear while vertigo is frequently due to an inner ear disorder.

Changes in price-cost structure of export industries affect the volume of exports and create disequilibrium in the balance of payments. Increase in prices due to higher wages, higher cost of raw materials, etc. reduces exports and makes the balance of payments unfavorable.

The balance of payment is the statement that files all the transactions between the entities, government anatomies, or individuals of one country to another for a given period of time. All the transaction details are mentioned in the statement, giving the authority a clear vision of the flow of funds.

How to correct disequilibrium in balance of payment? ›

The disequilibrium can be corrected using policies like currency devaluation, trade policy measures, exchange control and demand management. These policies aim at promoting exports, reducing imports and controlling foreign capital flows. However, these policies also have their costs and limitations.

This problem can be managed when exports start rising and imports start reducing. Policies must be created which will help in stimulating exports. Conditions should be created where people are more interested in purchasing domestic goods rather than importing goods.

The formula for the balance of payments is a summation of the current account, the capital account, and the financial account balances. The term balance of payments refers to recording all payments and obligations of imports from foreign countries vis-à-vis all payments and obligations of exports to foreign countries.

Factors affecting Balance of Payments

Ø Trade barriers: Trade barriers significantly affect the imports and exports of a country. Higher the trade barriers imposed by the foreign country against exporting country, lower will be the demand for goods and services supplied by exporting country.

Balance of trade (BoT) is the difference that is obtained from the export and import of goods. Balance of payments (BoP) is the difference between the inflow and outflow of foreign exchange. Transactions related to goods are included in BoT. Transactions related to transfers, goods, and services are included in BoP.

: to go quickly or unceremoniously : pop. bop into the corner store. often used with off. 2. : to dance or shuffle along to or as if to bop music.

The three major elements of the capital account are investments, foreign exchange reserves, and loans and borrowings.

The balance of payments is comprised of current, capital and financial accounts. The current account depicts the effects of foreign transactions, such as the trade in goods and services, primary income and secondary income, on the national income and on the balance between savings and investments in the economy.