Balance of payments gives a summary of the transactions of a given country’s economy with other countries in the world for a given period of time. Also known to most people as balance of international payments, BoP includes information of all the transactions that take place between the residents and non residents of a particular state. The records include transaction involving services, goods and even income. In terms of income, the statement encompasses information about any financial claims, transfers and liabilities with regards to the rest of the world.
The transactions that are contained in the balance of payment are usually classified into two accounts as indicated below.
- Capital account: This includes transactions on financial instruments and can include information on financial claims among others.
- Current account: This type of account contains transactions that involve goods, investment, services, current transfers and income.
A country’s Balance of payments and international investment position make up the set of its international accounts. In case it happens that there is a deficit in the current account, there is always an equal amount of surplus contained in the capital account. The same happens in case there is a deficit account in the capital account. However, it is always required that an evaluation needs to be made before any decisions are made.
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There are always higher chances that when a given country has got a higher price level, there is always going to be a deficit in the current account. The same will happen in case there is increased gross national product and interest rates. There are more factors apart from the a fore-mentioned that impact the outcome of a country’s current account like exchange rates and barriers to imports.
It is not often very easy to predict the effects of shifts in any of these factors on a current account. For example, if the United States government shifts tariffs upwards, Americans will be forced to obtain fewer imports. This will reflect on a reduced deficit in the current account. However, the reduction can be significant if either of the factors mentioned earlier on change to cause a cut in the surplus in the capital account. In case there is no change in any of the factors, the imports that have been reduced will reflect a downward trend in foreign currency demand. On the other hand, the value of the US $ will have significantly been raised. When the value of the dollar shoots up, the US exports will not be affordable to most people while imports will take the opposite twist. However, it is important to note that an increase in tariff has no impact on the current account balance.
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There are various kinds of goods and services whose transactions are indicated on a balance of payment, namely:
- Manufactured goods
- Raw materials
- Semi-finished goods
- Consumer goods
- Capital goods
- Transport and shipping
- Banking, insurance and consultancy services
- Tourism and industry
- Foreign exchange
- Research and development