Balance of payments is a record of the flow of all financial transactions between the residents of one country and the other countries in statistical form and over a given period of time.
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The BOP Must Balance:
Yes, if it does not, it means something has not been properly counted or wrongly counted.
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Subaccounts of the BOP, such as the merchandise trade balance, may be imbalanced, but the entire BOP of an individual country is always balanced.
BOP is based on Double Entry System of Book Keeping:
Every transaction has a debit and credit. If asset increases or liability decreases then the two transactions are to be debited and vice versa. Suppose India imports some electronics goods from Japan to the tune of $100 million, the entry would be Imports to be debited and capital or finance account is to be credited.
The transaction in one aspect shows a source (+) and tells as to where from we got the money in international transaction, and in the other aspect as a use to show as to what we did with the money. It must be noted that the signs for sources and uses are opposite to those of changes in the balance sheet.
BOP is not a Balance Sheet:
Yes, it is a Flow Statement. BOP records transactions of one year only. It does not show accumulated balances or stock of foreign assets and liabilities. Thus it is a Sources/Uses Statement.
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Germany runs a huge current account surplus. Projected to amount to 5.5% of GDP in 2010, this surplus is not far behind China’s 6.2%.
Since there are many components of BOP and the BOP is always balanced, it will be desirable to study it through its constituting balances. In terms of current account balance in 2008, China had the most positive current account balance with $426 billion, followed by Germany with $243 billion.
However, the USA had the largest negative current account balance with $706 billion in 2008, followed by Spain with $154 billion. In terms of foreign exchange reserves at the end of 2008, China had the largest reserves with $1,966 trillion, followed by Japan with $1.030 trillion. India’s exchange reserve stood at $257 billion at the end of 2008.
