Balance of Payment (BOP) - All you need to Know

What is Balance of Payment (BOP)?

Balance of Payment (BOP) is a statement prepared by the central bank of the country as per the format provided by IMF to record the transactions in goods, services and assets taken place between the residents of the country and rest of the world for a specific time period.

Residents of the country consist of: 

• individuals, 
• companies and 
• government.

What are the components of Balance of Payment?

The Balance of Payment can be consist of two main components:

• Current Account
• Capital Account

i) Current Account 

Current account monitors the flow of goods and services between the countries.

The current account in Balance of Payment records the transaction statements consisting of:

• Import and export of Goods
• Services
• Transfer of Payments

What is Current Account Balance in BOP?

The Current Account balance in Balance of Payment is formed by the summation of:

• Trade Balance, 
• Services and 
• Transfer of Payment

Visible and Invisible trade

The import and export of goods forms part of VISIBLE TRADE whereas Services and Transfer of Payments form part of INVISIBLE TRADE.

1) VISIBLE TRADE

A. Import and export of Goods

• Trade Balance:

The difference between the exports and imports of goods forms the trade balance.

Trade Balance is reported by Ministry of Commerce and Industry.

Trade balance can be either surplus or deficit:

• Trade Surplus: 

When export of goods exceeds import of goods for a specific time period, it results into trade surplus. 

• Trade Deficit: 

When import of goods exceeds export of goods for a specific time period, it results into trade deficit. 

2) INVISIBLE TRADE

B. Services

The flow of funds from service sector such as IT industry, tourism, transportation, etc forms part of invisible trade under SERVICES category.

C. Transfer of Payments

The Transfer of Payments are the payments which residents of a country receive for free, without having the liability to pay it in future.

Transfer of payments is received in the form of:

• Remittances,
• Gifts,
• Foreign aid - Donations, Grants 

ii) Capital Account 

All the international purchases and sales of assets such as stock bonds, etc., are recorded under Capital Account in Balance of Payment.