Meaning Of Balance Of Payment (BOP): Types, Concepts And Ways Of Financing BOP Deficit

Economics

Topic: Balance Of Payment (BOP)

Table Of Content

  • Definition Of Balance Of Payment
  • Types Of Balance Of Payment
  • Roles Of Money In International Transactions
  • Balance Of Payment (BOP) Concepts
  • Bop Adjustment/Ways Of Correction Reducing Bop Deficit
  • Ways Of Financing Bop Deficit

Meaning Of Balance Of Payment

Definition>> Balance of payment is a record showing the relationship between the sum total of both the receipt (income from export and payment expenditure on import of a country in international trade ove a given period.

Or It refers to the relationship between receipt and payment of all kinds made by countries in international trade. Example: If Nigeria receive from Ghana three million naira as revenue and pay to another country three million for the imports then the relationship between those payment and the receipt is what is called Balance Of Payment.

However, it is therefore a statical summary of the economic transaction that took place between the resident of that country and the rest of the world in an accounting period. It shows the countries of the world. Payment are made from receipt gotten from visible and invisible items in international trade which includes: exports, re-exports and imports of physical goods. On the other hand, Visible includes: Payment for, and receipt from services rendered, Such as shipping, banking, insurance, etc

Types Of Balance Of Payment

There are three types of balance of payment, which are:

1. Favourable balance of payment.

2. Unfavourable balance of payment.

3. Balanced balance of payment.

1. Favourable Balance Of Payment: This is the surplus or credit balance when the combined payment on the current and long term capital account of a country are less than the receipt or when the income flow of a country is more than the expenditure flows. It is used to build up foreign reserves by foreign investors etc.

2. Unfavourable Balance Of Payment: It is known as the deficit or debit balance. It is also when the combined receipts on the current and long term capital accounts of a country are lesser than the payment that is when a country’s income flows.

3. Balanced Balance Of Payment: This is when income flows is caval to expenditure.

Roles Of Money In International Transactions

Money pays vital role in international transaction. It performs the same functions as in local transaction. These includes:

1. It serves as a medium of exchange.

2. Store of value.

3. Medium of value.

4. Unit of account.

5. Standard for different payment.

Balance Of Payment (Bop) Concepts

There are three concepts of balance of payment (Bop):

1. Current Account
2. Capital Account
3. Monetary Account

1. Current Account

Current account is the flow of payment and receipt of goods/visible merchandise trade and services/invisible trade including payments for investment income of a country during a given year. It is the make up of BOT and invisible i.e trade balances.

(BOT) is is the relationship/differences between the total value of a country’s visible exports & visible imports (ie) goods sold and bought within a given period. It is referred to as merchandise Account Balance.

The current account balance is the sum of the balance of trade and the invisible trade balance i.e of trade and the difference between the value of a country’s exports and imports and services over a given period of one year. Current account balance = BOT + ITB.

2. Capital Account

This is the difference between capital imports within a given period of time usually one year. It shows the balance of capital transaction (i.e inwards and outwards). Flow of money for direct investment and loans is both short and long term (loans). This could be favourable: Unfavourable = c x > cm .

3. Monetary Movement Account

This is the residual or balancing segment of the balance of payment accounts which shows how the balance on both current and capital account are settled. This could be loans from various sources or the use of gold reserves, which shows an outflow of funds from the account or deficit balance (ie) surplus will increase the amount of foreign exchange held by the government.

BOP Adjustment/Ways Of Correction Reducing BOP Deficit

1. The Use Of Fiscal Policy Measures: This involves the use of taxes/tariffs, imports and exports duties which the government imposed on goods. High import duties are meant to increase the price/cost of imported goods and reduce their demand while reduction in export duties are meant to reduce the cost of exportable goods as to increase their demand in the world market.

2. Control Of Foreign Exchange Transaction: This helps to control the amount of foreign exchange bought and sold for different types of importation and it is country’s scales of foreign exchange as import are reduced to the currency value of exports.

3. External Borrowing: The country may resort to borrowing from richer countries or they can seek assistance from the international monetary fund (im <).

4. Exchange Rate Policy/Devaluation Of Domestic Currency/Appreciation Of Other Currencies: A country that has a device ‘Bop’ can connect it through devaluation of it’s currency. ‘Devaluation’ means the reduction in the value of the income currencies, Through this process in country’s imports are reduced because the goods that will now be exports will be cheaper and fund winders market, more money will be realised from exports which will affect the deficit in the Bop. Devaluation can be effective method if the country involved has money, goods to export.

5. Sales Of Foreign Investment/Assets: The country involves may sell some of it’s foreign investment to pay off/reduce the Bop deficit.

6. Stimulation Of Export: The country can encourage exports by making it to be tax free.

7. Deflation: Through deflation government can reduce the amount of money in the hands of the fuldice. The will demand less of commodities. Since the demand has fallen, process will also fall. When the process of goods including export gods have fallen, more of export goods will be demanded by foreigners.

Ways Of Financing Bop Deficit

1. Drancing On Imf Special Drawing Right: This will be sued to settle imports bills.

2. External Borrowing: This involves borrowing from richer countries or imf using supplies credit etc.

3. Sales of foreign investment and assets.

4. Exports promotion including the exports of goods reserver.

5. Grants and aids from friendly countries and organisation.