Problems Related To The Balance Of Payments

The balance of payments is a method to keep a check on transactions taking place within international borders. When funds are transferred to the country’s treasury, credits are added to the balance of payments. However, if funds are transferred to another nation, the credit is deducted from the balance of payments. For example, if India buys (imports) 20 bullet trains from Japan, funds will be transferred, and a credit will be deducted. Whereas, if India supplies (exports), let’s say, machine parts, a credit is added to the balance of payments.  

Balance of Payments

The balance of payments is a system or method that monitors all transactions. If there is any movement of capital from one nation to another, it is recorded on the balance of payments sheet. This system can be divided into the capital and financial account (CFA) and the current account (CA).

If any transactions lead to selling a bond or result in liability for another nation, this too will be recorded in the capital and financial account (CFA). Anything that happens in one account is offset by what is happening in another account. 

Balance of Trade  

Just as the balance of payments keeps a record of all transactions that happen within international boundaries, the balance of trade keeps a record of the difference between export and import values within a specific time. It is also an important and essential part of a balance of payments. People often differentiate between the balance of trade of service and the balance of trade of goods as two different values. International trade balance, commercial balance, trade balance, or net exports can also be used interchangeably in place of the balance of trade. 

Impact of Balance of Payments on a Country’s Economy

In a perfect situation, the balance of payments should be maintained at zero. This means that imports (money going out) and exports (capital coming in) should balance each other out. However, unfortunately, this perfect scenario only exists in theory. 

Every country should correctly declare its balance of payments as this helps determine if a deficit or surplus of capital is available. If the values are surplus, it means that the export rate is much higher than the import rate. On the other hand, a deficit means that money is going out in place of coming in. Surplus and deficit values can lead to long or short term impacts on a country’s economy.

Importance of Balance of Payments

The balance of payments is important for determining any country’s financial statements. It helps obtain a clear idea about transactions occurring between two countries. It also helps determine economic relations. We become aware of surplus demand or supply. The data can further help understand if the country’s currency is depreciating or appreciating compared to other nations. 

It also helps countries choose their constructive economic partner. Another reason to determine the balance of payments is that it can help boost one country’s position in international economic growth. By carefully examining this chart, analysts and financial experts can decide if existing trends are harmful or beneficial for the economy, which also helps them take constructive measures.

Why Should Balance of Payments be Equal and Balanced? 

The balance of payments should be equal and balanced; in other words, the country’s export and import rates should be equal. It should balance all goods, services, and resources traded in the international market. Thus, it should balance the movement of capital or another financial asset from one country to another. 

Conclusion

The balance of payments is helpful for governments to determine industry export growth potential, thus helping initiate policies. Further, the balance of payments helps monitor transactions of all exports and imports of services within a period. The balance of payments also helps keep a systematic record of all transactions between citizens of a country and foreign countries.