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Why Balance of Payments of a Country Always Balances ?

square Balance of Payments (BOP) - Introduction ↓

Since the balance of payment is based upon system of double-entry book-keeping, the total debits must equal to total credits. This is because two aspects of each transaction recorded are equal in amount but appear on opposite sides of the balance of payments account. In this accounting sense, balances of payments for a country must always balance.

Balance of Payments of a Country Always Balances

The debit side shows the use of total foreign exchange acquired in a particular period.

The credit side shows the sources from which the foreign exchange is acquired during a particular period.

Against every credit entry, there is an offsetting debit entry & vise-versa, so the receipts and payments on these two sides must be equal. Hence the two sides must necessary balance.

If X imports from Y, Y would also import from X. Hence there would be a debit and credit entries in the balance of payments of both the countries X & Y.

The individual items in the balance of payments may not balance. But the total credits of the country must be equals to its total debits.

If there is any deficit in any individual account, it would be covered by a surplus in other accounts, if there is any difference between total debits and total credits, it would be settled under 'errors & omissions'. Hence in the accounting sense, the balance of payments of a country always balances.

square Balance of Payments (BOP) Account of a Country ↓

Balance of Payments of a Country Always Balances

The items 1 to 7 show the total receipts from all sources. These receipts amount to Rs. 1000 Crores.

The items 1(a) to 7(a) Show the total payments on all accounts. These payments amount to Rs. 990 Crores. When item 8 included, the total payment is Rs. 1000 Crores, hence the total credit is equal to the total debit.

Thus the current account and capital account Balance each other. Thus surplus in the current account is equal to the deficit in the capital account. A deficit in the current account is equal to the surplus in the capital account.

In the above given table, the balance of current account shows a deficit of Rs. 200 crores But there is a corresponding surplus of Rs. 200 crores in the balance of capital account.

Hence the credit and debit sides balance & the balance of payments is in equilibrium.

The balance of trade of a country may not balance. For instance, if exports exceed imports, there is a surplus and a favourable balance of trade and vice-versa. Only if the value of exports is equal to the value of imports, the balance of trade is said to be in equilibrium.

But the balance of payments always balances because every transaction must be settled. Hence total debits must be equal to the total credits.

1 Comment:

  1. Anonymous said...

    twas nice learning about how the 4 factors of production works..it was highly appretiated

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