Friday, 18 July 2014 07:00


The Balance of Payment is the account of records maintained by the government of a country to track the transactions related to foreign merchandise trade, visible and invisible trade, foreign aids, borrowings and other transfers. Ideally balance of payment position should equate to zero as the capital and current account balance each other. Deteriorating BOP position is bad for a country’s fiscal as well as financial health. Some related terms are defined below:

Balance of Payment: It is the annual statement recorded for the government to record for the year’s trade and its balance. In other words it is the summation of imports and exports made for visible and invisible items along with the records of borrowings and asset sale abroad by the domestic country that trade with other countries. There are two accounts that are prepared to measure the balance of payment. These are capital account and current account.

Balance of trade: The difference in value over a period of time between a country's merchandise imports and exports.

Capital Account: Transactions recorded under capital account are those that do not involve any income or expenditure. In other words the transaction records for the loan, payment, foreign aid, foreign remittances and other forms of transfer payment that are received or sent to other countries. It also records sale and purchase of capital assets abroad.

Closed economy: A closed economy is one in which there are no foreign trade transactions or any other form of economic contacts with the rest of the world.

Currency appreciation: An increase in the value of one currency relative to another currency. Under the floating exchange rate system, the appreciation occurs where a unit of currency buys more units of another currency because of a change in exchange rates.

Current Account: Current Account is nothing but records of the payment and receipt of the country with other country on current account. This records the merchandise trade balance and trade in invisibles. A surplus on this account is termed as trade surplus

Depreciation: Depreciation is defined for the currency movement in terms of other currencies of the world. If a country pays more of its domestic currency in terms for one unit of the foreign currency it is known as depreciation of currency. In layman words the depreciation implies reduction in value of domestic currency vis a vis foreign currency.

Foreign aid: The international transfer of public funds in the form of loans or grants either directly from one government to another (bilateral assistance) or indirectly through the vehicle of a multilateral assistance agency like the World Bank.

Foreign direct investment (FDI): Overseas investments by private multinational corporations.

Foreign exchange reserves: The stock of liquid assets denominated in foreign currencies held by a government's monetary authorities (typically, the finance ministry or central bank). Reserves enable the monetary authorities to intervene in foreign exchange markets to affect the exchange value of their domestic currency in the market. Reserves are invested in low-risk and liquid assets, often in foreign government securities.