What is Balance of Payment? BoP

 

What is balance of payment?

In simple terms, BOP is the transactions of the country with the rest of the world. The government of a country records each and every transaction which includes transactions carried out by public sector, private sector, and even individuals with the rest of the world. All these transactions are recorded on the basis of double entry principle, where both the debit and credit side of the transactions are included.

BOP is classified into two accounts, current account and capital account. In short, current account records day to day transactions and single way transactions like imports and exports which are always short term in nature, whereas in capital account, long term transactions like loan provided to a foreign country (asset), investment made by a foreign country are recorded.

This is just a gist for you to understand what balance of payment account is, we are not going in detail of current account, capital account, components under both the account. 

But just understand what happens here, the government basically records all these transactions to get a clearer view about the dollar inflows and outflows. So, when we import goods and services the dollar flows out and vice versa. 

Imagine the country has more outflows of dollars than inflows. What happens here? Basically, we can say there are more imports than export in that country which leads to trade deficit. When the country has more exports than imports, then it leads to trade surplus, which is a good thing. But in India, we are dependent on imports for most of the goods and services, and that's the reason we have trade deficit for most of the time. 

The trade deficit or current account deficit when maintained under control, it has no impact on the economy of the country. But when it rises above a certain percentage, it leads to disaster to the country's economy.