It is defined as systematic records of all types of transaction of a country with the rest of the world. It is the records of amount paid to and amount received from the rest of the world. The amount received may be repayable or not and amount paid may be receivable or not. The amount receive are called receipts and amount paid are called payments. There are 2 sides of balance of payment. They are receipts and payments. The transactions recorded in balance of payment may be visible or not, repayable or not, receivable or not. It includes expenditures made by a foreigner in the reporting country and expenditure made by a domestic person in foreign countries, export and import, diplomatic expenditure of foreign countries in the reporting country, factor income earned from and rest of the world and factor income earned by foreigner form the reporting country, foreign lending and borrowing, foreigner’s investment in the reporting county and investing of domestic entrepreneurs in foreign countries etc.
There are two accounts in balance of payment. They are
1. Current account
The systematic records of short term transactions of a country with the rest of the world is called current account. The transactions recorded in this account have effect for less than one year. It includes foreign tourist expenditure in reporting countries, expenditure of domestic people in foreign countries, interest received from and paid to other countries, remittance received and paid, diplomatic expenditures etc. Short term receipts are recorded in receipt side of current account and short term payment are recorded in the payment side of current account.
2. Capital account
The systematic record of long term transactions of a country with the rest of the world is called capital account. The transactions recorded in this account have effect for more than one year. It includes capital inflow and outflow, foreign lending and borrowing, repayment of foreign debt and principle of foreign debt received. Long term receipts are recorded in receipt side of capital account and long term payment are recorded in the payment side of capital account.
There are 3 types of balance of payment. They are as detailed below
1. Favorable balance of payment:
If the total receipts are greater than total payment of a country form rest of the world, the country is said to have favorable balance of payment. It means total inflow of money from the rest of the world in a year is greater than total outflow of money to the rest of the world. Total receipt is the sum of total short term receipt and total long term receipts. Total payment is the sum of total short term payment and total long term payment.
2. Unfavorable balance of payment:
If the total receipts are less than total payment of a country form rest of the world, the country is said to have unfavorable balance of payment. It means total inflow of money from the rest of the world in a year is less than total outflow of money to the rest of the world.
3. Zero balance of payment:
If the total receipts are equal to total payment of a country form rest of the world, the country is said to have zero balance of payment. It means total inflow of money from the rest of the world in a year is equal to total outflow of money to the rest of the world.
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