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Concept Introduction:
Balance of Payment (BOP): It is an account of what is received by the residents of the country from the rest of the world and what these residents have paid out to other countries on the account of the sale of goods, services and other invisible items as well as on the account of capital transfers from the other countries. It is divided into two accounts.
Current Account: It maintains all the transactions related to the exchange of goods and services and unilateral transfers. It includes shipping insurance and banking services, investment income, foreign travel, transfer payments and
Financial Account: It provides details of all the capital transfers such as investment and loans between one country and the rest of the world. Some components are banking capital, official capital, private capital, gold and foreign capital.
Relation: In an economy, the sum of both current account and balance account is zero because they are balanced.
The relation between them is,
Balance of Trade (BOT): It is a type of merchandise balance. It refers to the difference between the value of exports and imports. It highlights the visible trade transactions with the rest of the world for a given year. When the value of exports is more than its imports, the BOT is a surplus, when the value of imports is more than its exports, the BOT is a deficit and when both are equal, then it is balanced.
The formula to calculate BOT is,
Here,
- BOT is the balance of trade.
- VXis the value of exports.
- VM is the value of imports.
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