Balance of Payments:

An accounting statement that shows the value of imports and exports of tangible (visible) and intangible (invisible) goods during a year is called Balance of Payments (BoP).

• Tangible or visible goods means goods which have a physical existence i.e. they can be touched and seen. Intangible or invisible goods means services such as software development, banking, logistics, etc.
• Balance of Payments has a credit entry and a debit entry. All receipts by the home country from foreigners are recorded in the credit entry side and all payments by the home country to foreigners are recorded in the debit entry side.

Types of Balance of Payments: 

Balance of Payments can be either

1. Balanced or
2. Unbalanced.

1. Balanced Balance of Payment:

When the value of entries on the credit side equals that on the debit side, Balance of Payments is said to be balanced.

2. Unbalanced Balance of Payment:

When the /aiuSwf entries on the credit side is not equal to entries on the debit side, Balance of Payments is said to be unbalanced.

An unbalanced Balance of Payments can be further classified as follows:

1. Deficit Balance of Payments:
   In the statement of Balance of Payments, if payments are more than receipts i.e. the value of credit side entries is lesser than the values of debit side entries, then there is a deficit in the Balance of Payments.
2. Surplus Balance of Payments:
   • In the statement of Balance of Payments, if receipts are more than payments i.e. the value of credit side entries is greater than the value of debit side entries, then there is a surplus in the Balance of Payments.
   • According to the double entry book keeping system, a balance of payments always balances. However, in reality there can be a deficit or a surplus in the balance of payments.

Balance of Payments (BoP) consists of two accounts. They are:

1. Current account and
2. Capital account

I. Current Account: The current account records the credit and debit entries for :

1. Trade in merchandise goods (tangible goods):

• Receipts obtained by exporting items are recorded as credit entry (i.e. a ’+’ entry). Payments made for items imported are recorded as debit entry (i.e. a entry).
• The sum total on this section of current account (i.e. the sum of credit’+’ entry and debitentry; or say the difference of import and export) is called • the balance of trade or simply trade balance.
• If the payments for merchandise imports (i.e.entries) are greater than the receipts from merchandise exports (i.e. V entries) then there is a deficit in the balance of trade. The vice versa situation is called surplus on the balance of trade.

2. Trade in services (intangible things):

• The incomes from invisibles are recorded on credit side and payments on debit side.
• This includes banking, insurance, transportation, etc. through which transactions of import and export have occurred. ‘
• Current Account Balance = Trade Balance + Income Balance + Net Unilateral transfer.

II. Capital Account:

• Capital account records receipts and payments from transactions on assets such as assets like stocks, gold, capital loans, etc. and other forms of fixed capital.
• The total of Current Account and Capital Account is called the Balance of Payments.

Factors influencing Balance of Payments:

• Factors influencing balance of payments means those factors that affect imports, exports, movement of capital, movement of factors of production, investment, lending, etc. in a nation are called factors influencing Balance of Payments.
• Deficit or surplus in the Balance of Payments can arise due to such factors.
• The impact of such factors usually depends upon the level of economic development of a country.

Some of these factors are:

• Exchange rate
• Prices of tradable goods in home country and in foreign countries
• Variety and quality of tradable goods
• Inevitable imports
• Level of economic development of the country
• Legal restrictions on trade
• Trade supporting facilities and infrastructure like transport, communication, etc.