--%>

Purpose of Balance of Payment

Meaning: - as mentioned above, the balance of payments is a periodic accounting of international economic transactions. Each country having regular economic transactions with other countries prepares periodically the final accounts of their foreign receipts and payments and of their financial inflows and outflow arising out of its international transactions. This account is called balance of payments (BOP). Thus, the BOP is statement of economic transactions of a country with the rest of the would over a period of time. Specifically, the BOP can be defined as a statement of all economic transactions between the residents of a nation and the rest of the would during a period of time usually one year. In practices, however, BOP accounts are prepared on quarterly basis also.  A brief explanation of some of the terms used in the definition of BOP is in order. 

The term systematic accounting does not refer to any particular system. However, the system which is generally adopted is double entry book-keeping system. In this accounting system both sides of a transaction debit and credit are recorded. 

Economic transactions: - include all the transactions that involve the transfer of title or ownership of goods. Services, money and assets between the residents of a country and the rest of the world. While some transactions involve physical transfer of goods. Money and assets along the transfer of the title, in some transactions, physical transfer is not necessary. For example, even if transfer of the title, in some transaction physical transfer is not necessary. For example, even if profits of a subsidiary of a foreign company is not transferred abroad of reinvested within the country it in located, it is deemed to be paid to the parent company abroad. What is important is the transfer of the title, not the physical transfer of what is transacted. 

The term residents mean the nationals of the reporting country. Diplomatic staff, foreign military personnel, to jurist's migratory workers and branches of the foreign companies is not treated as the residents even though they works and operate in the reporting country. 

Purpose: - the purpose of BOP accounting is to take the stock of country's foreign receipts and payment obligations and of assets and liabilities arising out of international economic transactions with a view to taking stock of gains and losses of foreign transaction and to correcting unhealthy trends some other important use of the BOP accounts are following 

First: - BOP accounting serves a very useful purpose in so far as it yields necessary information on the strength and weakness of the country in international economic status.

Second: - by analysing the BOP accounts of past years, one can find the overall gains and losses from the international economic transactions. It can be ascertained whether composition and direction of international trade and capital movements have improved of caused deterioration in the economic condition of the country. 

Third: - BOP statements give warning signals for future policy formulations. For even if the BOP position in recent past has not been a matter of concern, there may be unhealthy developments which might create problem in future, for example, building foreign exchange reserves on borrowed funds increase international indebtedness which might lead to financial bankruptcy.

   Related Questions in Macroeconomics

  • Q : Demand curves when longer periods are

    Whenever longer periods are considered and hence bigger ranges of adjustments (that is, substitutions) become probable, demand curves tend to become: (i) Flatter, and therefore do supply curves. (ii) Flatter, as supply curves become steeper. (iii) Ste

  • Q : Supply law and it's factors State the

    State the Law of supply and explain the factors that affecting supply of commodity

  • Q : Value of imports of goods The country’s

    The country’s balance of trade is Rs.500 crores. The value of exports of goods is Rs. 650 crores. What is the value of imports of goods?

  • Q : McConnell Brue Flynn 19e What

    What relationship does the MPC bear to the size of the multiplier

  • Q : Value of MPC Why can be value of MPC be

    Why can be value of MPC be not more than one? Answer: The value of MPC will not be more than one since increment in consumption (ΔC) can’t be more than

  • Q : How banking evolved into the

    Give a short history of how banking evolved into the sophisticated operation. Start first with the Goldsmith and sum up with the Banking system which we experience nowadays.

  • Q : Role of price in market economies What

    What is the role of price in market economies?

  • Q : Steps to analyze modifications in

    What are the Steps to analyze modifications in equilibrium?

  • Q : Control of Inflation Economists agree

    Economists agree that inflation beyond a moderate rate is undesirable as it can often prove disastrous and therefore, it must be kept under control. Economists agree also that an appropriate mix of fiscal and monetary policies can be helpful in controlling inflation.

  • Q : Maximizing consumer utility The

    The consumer maximizes the utility whenever spending patterns causes: (i) Total outlays to increase each time prices are altered. (ii) Marginal utilities of each and every good consumed to be equivalent. (iii) Marginal utilities from the last cent spent on each and ev