Balance of Payments (BOP) is the accounting records of the monetary transactions between a country and the other countries of the world over a fixed period of time.
These monetary transactions include inflow and outflow of financial capital and the payment made by the country for the export and import of goods and services.
The BOP is the summarized record of the international transactions conducted by the public as well as private organizations of the domestic country with the foreign countries.
It helps in estimating the trend of cash flow indicating how much capital has flown out of the country and how much capital has entered in the country.
The BOP is calculated on a quarterly and yearly basis in a single currency, generally in domestic currency of the related country. It has a debit and a credit side, where debit side shows the assets or inflow of capital and credit side shows the liabilities or outflow of capital.
The sources of capital, such as export of goods and services, are mentioned on the credit side. However, the uses of capital, such as import of goods and services and investment in foreign securities, are mentioned on the debit side of the BOP.
Theoretically, the debit side of the BOP should always match with its credit side. In other words, the summation of all the assets should be equal to the summation of all the liabilities. However, this situation is very rare in real life. Generally, the BOP of a country is in either surplus or deficit.
When the inflow of foreign currency is more than the outflow of the country’s currency, the BOP would be in surplus, whereas, if the inflow of foreign currency is less than the outflow of the country’s currency, the BOP would be in deficit.
The types of financial and economical transactions between two countries are listed as follows:
a. Purchasing or selling of goods and services by the residents of one country from the another country
b. Giving and receiving unilateral gift in kind by the residents of one country from the another country
c. Giving and receiving unilateral financial gift by the residents of one country from the another country
d. Investing in domestic and foreign securities
International Monetary Fund monitors the BOP of the countries and publishes annual reports. It has set various rules to regulate the international trade and maintain stability in BOP.