Balance of payment is a statement which record all the economic transactions between the resident of a country and the rest of the world within defined period of time. The period can be quarter of a year or more commonly over a year.
It is maintained in standard double book-keeping method.
The transactions are recorded on the debit or credit side.
Such record is useful for the government for decision making in various aspect.
The structure of balance of payment are as follows:
1) Trade Account:
The trade account in balance of payment include export and Import of all the visible and tangible items. the exports of such tangible good give rise to receipts and similarly the import of such goods give rise to payments. if the exports of such goods are equal to the imports then it is said that balance of trade is balance. If export is more than import than in this account then we have surplus trade account and vice versa.
2) Current account:
Current account includes
i) export and import of visible and tangible goods
ii) export and import of services such as banking, insurance, tourism etc.
iii) Receipts and payments in the form of profit, interest and dividend &
iv) Unilateral receipts and payments such as gifts, donation, remittances etc.
The current account is said to be in balance when all the items of receipt side is equal to payment side. When the receipts of current account is greater than the payments of current account then the current account is said to be in surplus and vice versa. The surplus in this account can be used for the development of economy whereas the deficit slows downs the development process.
3) Capital Account:
The capital account includes all inflow and outflow that involves changing the asset and liabilities between residents in one country and those in another countries.
The capital account includes :
i) Foreign investment and investments abroad in the form of direct and portfolio investment &
ii) Short term, medium term and long term borrowing and lending.
Here foreign direct investment is in the form of setting up plant and factories on their own or collaboration with resident country whereas portfolio investment is in the form of acquiring financial asset such as shares, bonds etc issued by foreign governments. Surplus in the capital
account reflect increase in foreign holdings whereas deficits reflects decrease in foreign holdings.
4) Statistical Discrepancy:
While recording transactions some international transactions get unreported, so it does not appear under standard heading. There are numerous transactions which takes place within defined period so here it reflects the difficulties which is involved in recording accurately.
5) Overall balance:
The overall balance is calculated by adding the current account, capital account and statistical discrepancy. If the receipt side of the balance of payment is positive then it is said that the overall balance is in surplus whereas if it reflects negative the overall balance is in deficit.