Balance of Payments
Balance of Payments
Overview
- The balance of payments refers to a detailed statement that presents the economic transactions that occur between a country’s residents and the rest of the world.
- These transactions include payment for the country’s exports and imports of goods, services, and financial capital, alongside financial transfers.
Components of Balance of Payments
- Current Account: It encompasses trade in goods and services, net earnings on overseas investments, and net transfer payments.
- Capital Account: It records capital transactions, involving the purchase and sale of non-financial and non-produced assets.
- Financial Account: It includes all transactions associated with changes in ownership of a country’s foreign assets and liabilities.
Balance of Payments Deficits and Surpluses
- A balance of payments surplus implies the country’s exports value is greater than its imports value. It is the result of selling more to the rest of the world than what the country is buying.
- A balance of payments deficit shows that the imports value is more than the exports value. The country is buying more from the rest of the world than what it is selling.
Impacts of Balance of Payments
- A persistent deficit in the balance of payments might lead to decrease in a country’s foreign exchange reserves, which in turn may cause economic instability.
- A surplus in the balance of payments can boost confidence in an economy and attract more investment.
Globalisation and Balance of Payments
- Globalisation involves the interconnection and integration between different economies worldwide.
- The increasing interconnectedness due to globalisation can have implications for a country’s balance of payments. For instance, increased foreign investment can affect the financial account whilst increased import-export activities might impact the current account.
- Trade liberalisation, a facet of globalisation, can influence a country’s balance of payments. Certain economies may benefit from increased exports (surplus) while others may suffer from increased imports (deficit).
Understanding Balance of Payments and Globalisation: Summary
- Balance of Payments records all transactions between a country and the rest of the world.
- Current account, Capital account, and Financial account are three important segments of Balance of Payments.
- A Balance of Payments surplus or deficit can impact a country’s economic health.
- Globalisation can directly impinge on a country’s Balance of Payments. Understanding these impacts assists in the formulation of economic policies.