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Components Of Balance Of Payments

 Balance of Payments Meaning and Components

Introduction

“The balance of payments is merely a way of listing receipts and payments in international transactions for a nation. It shows the nation’s trading positions variations in its net position as a foreign lender or borrower and variations in its official reserve holding.”

Structure of Balance of Payments Accounts

The balance of payments account of a nation is assembled on the doctrine of double entry book keeping. Every transaction is entered on the credit and debit side of the Income Statement and assets and liabilities on the balance sheet.

However balance of payments accounting varies from the business accounting in one aspect. In business accounting debits (minus) are presented on the left side and credits (plus) are represented on the right side of the income statements.

Whereas in the balance of payments accounting the practice is to present credits on the left side and debits on the right side of the balance of payments sheet.

Principles

  1. If a payment is received from overseas account, it is a credit transaction.
  1. While if payment made to overseas account it is a debit transaction.
  1. The chief items presented on the credit side (plus) are exports of goods and services, transferred receipts in the form of gifts, subscription etc from overseas account, borrowings from overseas account investments by overseas account in the nation and official sale of reserve assets incorporating gold to overseas account and abroad agencies.
  1. The principal items on the debit side (minus) are imports of goods and services, unrequited payments to overseas account as gifts, subscriptions etc, lending to overseas account investments by residents to overseas account and official purchase of reserve assets or gold from overseas account and overseas agencies.
  1. These credits and debits are presented vertically in the balance of payments sheet of a nation as per the principle of double entry book keeping.
  1. Horizontally they are classified under three categories: the current account, the capital account and the official settlements accounts or the official reserve assets account.

Now let us see the structure of Balance of Payments Sheet and the items incorporated there with:

Balance of Payments Account

Receipts
Credits (plus)

Payments
Debits (minus)

Current Account

Exports

Imports

Merchandise

Merchandise

Services

Services

Unrequited or Transfers

Unrequited or Transfers

Capital Account

Borrowings from Overseas Account

Lending to Overseas Account

Direct Investments by Overseas Account

Direct Investments in Overseas Account

Official Settlements Account

Enhancement in Overseas Official Holdings

Enhancement in Official Reserve of Gold and Overseas Currencies

Errors and Omissions

  1. Current Account
    1. The current account of a nation incorporates all transactions associating to business in merchandise and services and unrequited transfers.

    2. Service transactions comprise of costs of travel and transportation, insurance, earnings and imbursements of overseas investments etc.

    3. Transfer payments associate to gifts, subscriptions, overseas aid, remittance made by private etc. received from overseas individuals’ account and government to overseas individuals.

    4. In current account goods exports and imports are the most significant items. Merchandise exports are presented as the plus item and are computed free on board which means that cost of transportation, insurance etc. are eliminated.

    5. On the right side imports are presented as a minus item and are computed based on costs, insurance and freight and are incorporated.

    6. The deviation among exports and imports of a nation is its balance of visible imports; the balance of trade is likely.

    7. In the contra crate, when imports surpasses exports it is not likely transaction.

    8. It is but services, transfer payments or invisible items of the current account that reproduce the actual picture of the balance of payments account.

    9. The balance of exports and imports of services and transfer payments is termed as the balance of hidden trade.

    10. The hidden items along with perceptible item ascertain the real present account position. If exports of merchandise and services surpass imports of merchandise and services, the balance of payments is said to be likely transaction or vice versa it is not likely transaction.

    11. In current account, exports of merchandise and services and the receipts of transfer payments are shown in the credit side or left hand side as they depict receipts from overseas individuals.

    12. Alternatively, the imports of merchandise and services and subscriptions imbursements to overseas individuals are shown on the debits or right hand side as they depict the imbursements to overseas individuals.

    13. The net value of these perceptible items balances is the balance on the current account.

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