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THE BALANCE OF PAYMENTS Balance of payments can be defined as the measurement of the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific period of time, usually one year. The balance of payment is determined by the country’s exports and imports of goods, services, and financial capital, as well as financial transfers.It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). Balance of payments is one of the major indicators of a country’s status in international trade, with net capital outflow.
The balance of payments of a country is also said to be in equilibrium that is, when the demand for foreign exchange is exactly equivalent to the supply of it. On the other hand balance of payments is in disequilibrium when there is either a surplus or a deficit in the balance of payments.When there is a deficit in the balance of payments, the demand for foreign exchange exceeds the demand for it. Current accounts on the balance of payments are recorded transactions arising from trade in goods and services, from income owing to residents of one country to residents of another. The current account is split in to several components, some on which includes the visible trade and invisible trade accounts.Visible accounts also know as trade in goods records those tangible goods being imported and exported into and out of a country these goods include raw materials such as copper and oil (imports) and cars (exports).
On the other hand Invisible accounts also know as trade in services are usually said to be intangible services being bought by foreigners, these include records of financial services by banks, insurance agencies and firms , transport services such as shipping and air travel and also tourism.The Capital and Financial accounts is a major component in balance of payments as it records international transactions relating to the movement of ownership of financial assets such as company shares, bank loans and government securities. The Capital and financial accounts are made up of four elements which include direct investment, portfolio investment, other investment and reserve assets. Direct investment relates to changes in non-resident ownership of domestic firms and resident ownership of foreign firms.Portfolio investment on the other hand, is investment in bonds or a minority holding of shares that does not involve legal control.
Direct and portfolio investment combined is sometimes referred to as the long-term capital element of capital financial accounts. Other investments is made up mainly of what are called short-term capital flows, which includes transfers into overseas banks, and sales or purchase of short-term financial instruments, such as Treasury bills or commercial bills. Reserve assets’ are those financial assets that can be used as international means of payments through for example, foreign exchanges. Balance of payments gives a complete and detailed account and record of all types of imports and exports, to which a county formulates its economic, industrial and business policies which may greatly affect its foreign trade and it determines or adjusts the foreign exchange rates of its currency.Moreover if a situation arises that a country’s foreign receipts are greater than payments, the balance of payment will be positive, on the other hand if receipts are less than payments, the balance will be a negative balance. If the balance of payments continues to be negative it may cause devaluation of the currency in an effort to bring the balance to a favourable stage.
Devaluation is said to cause a fall in the value of the country’s currency.On the other hand consistent and stable positive balance of payment may call for an upward revaluation, this is said to cause a rise in the value of a currency in the foreign exchange market. To understand the nature of balance of payment the flow of items is taken into account, the imports and exports of goods and services, also long and short foreign loads, medical, educational and hotel services, interest on income and expenses, tourist arrivals and government delegation. ?