What is the Concept of Balance of Payments ?
In the modern world, it is very rare that any country is self sufficient means that it can produce all the goods and services it needs.
Every country imports goods that it cannot produce at home for some reason and exports goods which other countries willing to buy and it can produce.
Balance of Payments –
The balance of payments is a systematically managed record of economic transactions of the residents of a country with the rest of the world during a given period of time.
This record (Balance of Payments) measures the various components of a country’s external economic transactions.
The aim of this record is to present an account of all receipts and payments on account of goods exported, services rendered, capital received by the residents of the country and goods imported, services received, capital transferred by the residents of the country.
The main reason of keeping these records is to know the international economic position of the country and help the government in taking decisions related to monetary and fiscal policies.
Balance of Trade –
Balance of trade refers to the difference in value of imports and exports of goods only (means visible items only). The movement of goods between countries is called Visible Trade because the movement is open and can be verified by the custom officials.
The balance of payments will be called balanced when the exports and imports of a country are exactly equal during a given period of time.
But this is not necessary that the exports and imports of a country are exactly equal during a given period of time.
If the value of exports is more than the value of imports, then the country will have an export surplus or a favourable balance of trade.
If the value of imports is more than the value of exports, then the country will have a deficit or adverse (unfavourable) balance of trade.
Exports and imports of a country are rarely equal and a country may have favourable or adverse balance of trade during any given period of time.
Determinants of Balance of Payments –
There are several variables which determines the balance of payments position of a country. Such as
1. National income at Home and Abroad
2. Exchange Rate of National Currency
3. The Prices of Goods and Factors
4. International Prices of Oil and Commodities
5. The Supply of Money
6. The Rate of Interest
All of the above factors determines the exports, imports and demand and supply of foreign currency.
All of these variables also depends on the other factors such as supply of factors of production, production function, the state of technology, tastes of the consumers, economic conditions of the country, distribution of income in the country, state of expectations etc. If there is a change in any of these variables and no appreciate change in other variables, disequilibrium will be the result.
The main cause of the disequilibrium in the balance of payments is the imbalance between exports and imports of goods and services, means deficit or surplus in balance of payments.