Learn with steem: Balance Of Payment- What you should know

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Hello friends,
It is great to be here again to discuss a subject of great importance, the topic is no other than Balance of Payment.

At the end of this post, we should have been able to learn some things, amongst which are:

• We should be able to easily identify the factors that give rise to the payment of cash out and into a country.

• We should also be able to explain some Concepts of B.O.P, such as current account balance, trade balance and the overall balance.

• We should also be able to identify ways of handling balance of payment disequilibrium.

Without prolonging our journey let's begin our learning with the definition of B.O.P.

WHAT IS BALANCE OF PAYMENT

Balance of payment can be explained to be the sum total of the payment given to a country for her exports and receipts for her imports.

It can also be said to be the statement of expenditure and income of an international account, over a specific period of time, a year to be precise.

In other words, it is a record that shows the relationship between the total of a country's payment to other countries and the receipts a country receives from other countries, within a year.

SECTORS OF BALANCE OF PAYMENTS

The balance of payment belonging to a country can be divided into 3 major parts; Current Account, Capital Account and Monetary Account

• CURRENT ACCOUNT:
  The current account is one that is composed of the total payment and receipts on goods and services that are visible and invisible.

We might be wondering, what are invisible goods and services, well, the likes of insurance, tourism, transportation etc.

While visible goods are the likes of cocoa, crude oil, automobiles etc

• CAPITAL ACCOUNT:
  This account is one that deals with the movement of capital from a country's account to that of another country.
  Such as international grants, investment etc.

There exist a long and short term Capital movement.
And the balance of payment of a country is only favourable when the money inflow is greater than it's outflow.

• MONETARY MOVEMENT ACCOUNT:
  This account helps to display how the other two accounts are settled.
  It tells how the deficit and surplus of both accounts were settled.

Shall we proceed on this educative adventure.

IMPORTANCE OF MONEY IN INTERNATIONAL TRANSACTIONS

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The role of money in international transaction cannot be overemphasized, as both internal and external trades are made possible only with the use of money, and this makes them similar.

Although there's a slight difference between internal and external trade.
With the internal trade, both buyers and sellers make use of the same currency, and as such, there's no use for currency conversion.
While for foreign trade, the use of different currencies is needed, and as such currency conversion is necessary.

Money also serves as a unit of measurements which helps to store records of transactions.
The same way records are kept by firms and individuals to check if they are making profit, so also is the same way records are kept by countries.

Countries keep records of both their import and export inorder to check if their international trade is at a profit or loss.

Foreign exchange market was initiated due to the need to solve the challenges encountered between the currencies of different countries

BALANCE OF PAYMENT DISEQUILIBRIUM

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Balance of Payment disequilibrium can be said to be a condition that occurs when the combined total receipts of the current and capital account is not equal to the payments.

It can also be said to be a situation when the total receipts and total payment does not equal each other.

There are two types of balance of payment disequilibrium, we have;

• Balance of payment surplus
• Balance of payment deficit

1.) BALANCE OF PAYMENT SURPLUS:

Balance of payment surplus is said to occur when the total receipts received from other countries is greater than the total payment made to other countries during a specific period of time.

This situation is what give birth to what is known as favourable balance of payment, and the country in this case is said to be financially strong in it's financial international transaction.

EFFECTS OF BALANCE OF PAYMENT SURPLUS

• Greater net income
• Debit retirement
• Inflationary tendency
• Increase in economic activities.

2.) BALANCE OF PAYMENT DEFICIT:

This may be explained to be a condition whereby the total receipts on the current and long term capital account of a nation is lower than it's corresponding payment.

It can also be explained be said to be a condition that happens when a country's expenditure flow is greater than it's income flow.

CAUSES OF BALANCE OF PAYMENT DEFICIT

• Political instability
• Servicing of huge external debt
• Low level of agricultural production
• Low level of technological development
• Poor social and economic infrastructure

We shall be stopping here today, in our next lesson, we shall be learning on balance of adjustment.
See you again, thanks for visiting 💙