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.

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