Balance of Payments (BoP) – Meaning & Structure
The Balance of Payments (BoP) is the "Account Book" of a country. Just like a company has a P&L Account, a Country has a BoP Statement.
1. Definition
"Balance of Payments is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period."
- Residents: Individuals, Firms, Government.
- Transactions: Goods, Services, Loans, Gifts.
- Period: Usually 1 Financial Year.
2. The Structure of BoP
The BoP is divided into two main accounts (plus a Reserve account).
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3. Components Detailed
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4. The BoP Identity
The BoP must always balance mathematically.
Current Account Balance + Capital Account Balance + Reserve Changes = 0
- Surplus: If Exports > Imports, country earns dollars. Reserves go UP.
- Deficit: If Imports > Exports, country pays dollars. Reserves go DOWN.
5. Exam Notes: Writing the Answer
Question: "Define Balance of Payments and its components." (10 Marks)
Answering Strategy:
- Define: "Systematic record...".
- Structure: Draw the tree diagram (Current vs Capital).
- Visible vs Invisible: Distinctly explain Goods vs Services.
- Balance of Trade (BoT): Mention that BoT is only a part of Current Account (only Goods), whereas BoP is the whole.
Summary
- Current Account: Shows if a country is paying its way (Profit/Loss).
- Capital Account: Shows how the country is financing its deficit or investing its surplus (Loans/Assets).
- RBI: The keeper of the BoP statistics in India.
Quiz Time! 🎯
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