What is Balance of Payments?
Balance of payments is a term that refers to the net value of transactions that people in one country make with people in another country or countries. We tend to use the term balance of payments to mean the same thing as balance of trade, but it is not exactly the same thing.
Instead, the balance of payments is made up of a few different statistics, one of which is the "current account" or balance of trade. Any one of the statistical categories can be positive or negative. One country can have a trade deficit with another country. However, the whole balance of payments cannot be positive or negative. It must be balanced at a net of zero. This is because, for example, when we run a trade deficit with China, it is balanced by them lending us money.
The Balance of Payments (BOP) refers to the relation between the total amount of money that is coming into a country and the total amount of money that is going out of the country.
The ways in which money comes into a country include when it sells goods and services to other countries and by when investments are made by other countries in businesses in the country and when it sells securities created by the government to other countries. The ways in which money goes out of a country include when the country buys goods and services from other countries, when investments are made in businesses located in other countries and when securities issued by other countries are bought.
The Balance of Payments ideally should be equal to zero, but that is seldom the case with different countries either having a net inflow or outflow of money.
Balance of payment is the summarised description of the value of all the economic transactions that a country has with businesses and other institutions outside the country. This includes transactions with other countries ad with international institutions such as World Bank and International Monetary Fund.
Such summary covers the total payments and receipts for international trade, loans, and investments. All such transactions are classified in two groups - current account and a capital account. The balance on each account is reached by subtracting the payments from the receipts, giving either a surplus or a deficit. Where there is an overall deficit, the account is equalised by using country's foreign reserves or additional borrowing from abroad or financial institutions. When a country is unable to equalize its balance of payment in this way it may be forced to make changes in its financial and economic policies and systems.