The BOP of a country is a systematic recording of all economic transactions between residents of that country and the rest of the world during a given period of time".
The Balance of payments record is maintained in a standard double - entry book - keeping method. International transactions enter into record as credit or debit. The payments received from foreign countries enter as credit and payments made to other countries as debit. The following table shows the elements of BOP.
BALANCE OF PAYMENTS ACCOUNT
1. Export of goods.
Imports of goods.
Trade Account Balance
2. Export of services.
3. Interest, profit and dividends
4. Unilateral receipts.
Import of services.
Interest, profit and dividends paid.
Current Account Balance (1 to 4)
5. Foreign investments.
6. Short term borrowings.
7. Medium and long term borrowing.
Short term lending.
Medium and long term lending.
Capital Account Balance (5 to 7)
8. Errors and omissions.
9. Change in reserves. (+)
Errors and omissions.
Change in reserve (-)
Total Reciepts = Total Payments
1. Trade Balance :-
Trade balance is the difference between export and import of goods, usually referred as visible or tangible items. If the exports are more than imports, there will be trade surplus and if imports are more than exports, there will be trade deficit. Developing countries have most of the time suffered a deficit in their balance of payments. The trade balance forms a part of current account. In 2008-09, trade deficit of India was 118.6 US $ billion.
2. Current Account Balance :-
It is the difference between the receipts and payments on account of current account which includes trade balance. The current account includes export of services, interest, profits, dividends and unilateral receipts from abroad and the import of services, profits, interest, dividends and unilateral payments abroad. There can be either surplus or deficit in current account. When debits are more than credits or when payments are more than receipts deficit takes place. Current account surplus will take place when credits are more and debits are less.
Current account balance is very significant. It shows a country's earning and payments in foreign exchange. A surplus balance strengthens the country's international financial position. It could be used for development of the country. A deficit is a problem for any country but it creates a serious situation for developing countries. In 2009-10 India’s current account deficit was 38.4 US $ billion.
3. Capital Account Balance :-
It is the difference between receipts and payments on account of capital account. The transactions under this title involves inflows and outflows relating to investments, short term borrowings I lending, and medium term to long term borrowings / lending. There can be surplus or deficit in capital account. When credits are more than debits surplus will take place and when debits are more than credits deficit will take place. In 2009-10. India’s capital account surplus was 51.8 US $ billion.
4. Errors and Omissions :-
The double entry book - keeping principle states that for every credit, there is a corresponding debit and therefore, there should be a balance in BOP as well. In reality BOP may not balance, due to errors and omissions. Errors may be due to statistical discrepancies (differences) and omissions may be due to certain transactions may not get recorded. For Eg., remittance by an Indian working abroad to India may not get recorded etc. If the current and capital account shows a surplus of 20,000 $, then the BOP should show an increase of 20,000 $. But, if the statement shows an increase of 22,000 $, then there is an error or omission of 2,000 $ on credit side.