Balance of Payment

It is the concise documentation of all goods and service assets exchange and Financial transactions in an year by a country between other countries. BoP is the documentation of visible and invisible export and import of a country between rest of the world in a financial year. There are two methods to measure Balance of Payment - Current Account and Capital Account.

1. CURRENT ACCOUNT

The combination of value difference (difference between Export and Import) and transfer fee of trade on goods and services is called as Current Account. Import and Export is included in Service trade. Besides the price of goods and services, the income gets for free is called as transfer fee. Examples for transfer fee are Gift, Money from aboard, grants etc.. Through the purchasing of a foreign product, the import of objects can increase and also can decrease the demand of domestic products. Through the export of goods, the coming of foreign money will increase and this will increase the domestic demand.

Balance Current Account 

According to Current Account, Balance Current Account is the situation when the value of import and export becomes equal. The income from current account transactions are called as current incomes. The payment on current account transactions are called as current payments.

Current Account Surplus - When the current account income exceeds the expenditure, it is termed as current account surplus. It is also called as current account balance positive. The meaning of current account surplus is that we are giving debt to other countries.

Current Account Surplus = Income > Expenditure

Current Account Deficit - When the current account expenditure exceeds the income, it is termed as Current Account Deficit. It is also called as current account balance negative. The meaning of current account deficit is that we are borrowing debt.

Current Account Deficit = Income < Expenditure

Equal Current Account - When the current account income becomes equal to current account expenditure, it is termed as Equal Current Account.

Equal Current Account = Income = Expenditure

Balance Current Account has two factors - Balance of Trade and Invisible Balance of Trade.

Balance of Trade (BoT)

The difference between the total income value and total export value of a country in one year is termed as Balance of Trade. Balance of Trade is also a part of Balance of Payment. The export of goods is the income to the Balance of Trade and the import of goods is the expenditure to the Balance of Trade. So it is termed as Balance of Trade. If the value of export and import become equal. It is called as Balance of Trade Equilibrium. If the export value is less than import value, the Balance of Trade will be deficit. Only visible items are included in the Balance of Trade. There is no services in Balance of Trade.

Invisible Balance of Trade

The gross invisible current account is the total of the difference between a country's exports and imports of services and transfer payments. The combination of both incoming and outgoing of various services and money exchange between the countries are termed as Invisible Balance of Trade. Factor Income and Non Factor Income is included in the trade of services. Factor income means the income generated from production factors (Land, Employment, Capital, Entrepreneurship). Non Factor Income means the income and expenditure from Tourism, Software Service etc.

2. CAPITAL ACCOUNT

The account related to Capital is known as Capital Account. Capital Account mainly comprises of international short term - long term loans, international capital deposits, international portfolio deposits etc. It is related to buying and selling of assets at international level. Assets are conditions of protecting wealth. Examples of Assets are money, share, debenture, government debt etc. Assets purchased from Capital Account should be calculated as money expenditure. The capital loan taken by india from International Monetary Fund is documented in Balance of Payment Capital Account.

Balance of Capital Account - Whenever the value of capital assets which is flowing inside and outside the country becomes equal, the capital account becomes balanced. If the Capital flow from foreign countries to the country is more than the capital flow from the country to other countries, then it is called as Capital Account Surplus. The money flow to foreign countries is less than the money flow to the country, then the capital account should be surplus. If the capital flow from the foreign countries to the country is less than the capital flow from the country to other countries, then it is called as capital account deficit. If the money flow to foreign countries is more than the money flow to the country, then the capital account should be deficit. The ways of money flow from foreign countries to the country are international loan, foreigners, buying shares by indian companies etc. Debt Payment, buying assets of foreign countries are the ways of flow of money from the country to foreign countries.

Surplus and Deficit of Balance of Payment

When a country comes to Balance of Payment equilibrium, its current account deficit is completely fill up through international loans. That is, a country want to use its foreign reserve to fill up current account deficit. If the country face foreign currency deficit, Reserve bank will sale foreign currency from its reserve. It is termed as official reserve sale. In order to fill up international deficit, the country will sell assets domestically or will borrow debt from other countries. Any deficit on current account is fill up from income and surplus of capital account. Any fluctuations on payment deposit and ultimate give and take of money is fill up by Central Monetary institutions of each countries respectively. 

The Items in Balance of Payment are Autonomous Transactions and Accommodating Transaction. The financial transactions aimed on more consumption, make more profit etc are called as Autonomous Transaction. The impact made by Autonomous Transaction is the base of Accommodating Transaction.

Note : RBI modified the structure of accounts following the Balance of Payments and International position manual introduced by International Monetary Fund (IMF). According to new classification, transactions are divided into three as Current Account, Financial Account and Capital Account. The trade of financial assets such as Shares, Debenture and other transactions were included in the Financial Account is the major change. Currently RBI is publishing accounts (Current Account and Capital Account respectively) in same old method.