Balance of Payment: This is the relationship between a country’s total payments to other countries and its total receipts from those countries over a period of time (usually one year).
Components of Balance of Payment
1. Current Account
This deals with payments and receipts for goods and services. It shows income and expenditure on both visible and invisible trade.
- Visible trade: Export and import of physical goods
- Invisible trade: Services like banking, insurance, tourism, shipping
2. Capital Account
This records the movement of capital into and out of the country.
- Foreign direct investment
- Portfolio investment
- Loans and grants
- Government reserves
Types of Balance of Payment
- Favourable/Surplus: When receipts exceed payments
- Unfavourable/Deficit: When payments exceed receipts
- Equilibrium: When receipts equal payments