What is Balance of Payments (BOP)? What is its significance?

The Balance of Payments (BOP) of a country refers to a systematic record of all economic transactions between the residents of a country and the rest of the world. Balance of payments (BOP) is composed of all receipts on account of goods exported, services rendered and capital received by residents and payments made by them on account of goods imported, services received and capital transferred to non-residents or foreigners. A balance of payments table is designed to summarize a nation’s transaction with the outside world. The balance of payments of a country consists of

  • Current Account.
  • Capital Account.
  • Cash Account/Official Reserve Assets Account.

The current account component portrays the flow of goods and services in the form of exports and imports for a country during a given year. The capital account shows the volume of private foreign investment and public grants and loans from individual nations and multilateral donor agencies such as IMF, World Bank etc.

Significance of Balance of Payments

A country’s balance of payments reveals various aspects of a country’s international economic position. Balance of payments (BOP) presents the international financial position of the country.

Balance of payment helps the government in taking decisions on monetary and fiscal policies on the one hand and on external trade and payments issues on the other. In case of a developing country, the balance of payments shows the extent of dependence of the country’s economic development on the financial assistance by the developed countries.

The greatest importance of balance of payments lies in its serving as an indicator of changing international economic position of a country. The balance of payments is the economic barometer which can be used to appraise a nation’s short-term international economic prospects to evaluate the degree of its international solvency and to determine the appropriateness of the exchange rate of country currency.

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