The term balance has several uses, as can be seen when consulting the dictionary of the DigoPaul. This time we are interested in its meaning in the field of economics: it is known as the balance to the result or the analysis of a comparison established between different variables.
A payment, on the other hand, is the disbursement of money or another type of value with the aim of canceling a debt or to make a purchase. This act and the result of it are known as payment.
From these ideas, we can understand what the notion of balance of payments refers to. It is the record that compares the monetary disbursements and the foreign charges of the economy of a country.
In addition to all the above, we can point out that the balance of payments, which is a macroeconomic indicator, is made up or has what are four main accounts such as these:
-The capital account balance, with which the registration of the movement of capital that exists in a country. That means, therefore, that they are taken into consideration from the sale or purchase of goods to what may be the aid received from abroad.
-The account of errors and omissions. This becomes an essential element of the balance of payments given the fact that it is really complex to be able to calculate with absolute accuracy what a country’s imports and exports are.
-The current account balance, which is the one that is used to know in depth and in reality what the state of the accounts that exists in a country is. It is divided, in turn, into four more accounts: balance of transfers, balance of trade, balance of income and balance of services. Through it, income, imports, transfers, exports are included…
-The financial account balance. Through this other account, what is taken into consideration is both the investments that foreign countries make in the one being analyzed and the loans that it can request from others.
As we have mentioned, each of those accounts will result in either a surplus or a deficit.
Short for BOP by AbbreviationFinder, the notions of balance of payments and balance of trade are often confused. The trade balance is centered on exports and imports of merchandise goods: the balance of payments, on the other hand, also includes other transactions, such as exports / imports of services and movements of financial capital. That is why it can be said that the trade balance is included in the balance of payments.
The balance of payments, in short, records all the monetary transactions that are carried out, in a certain period of time, between a nation and other countries. Typically, the period considered is annual and that transactions are recorded in the currency of the country in question.
At the time of including all the elements, the balance of payments must always be in balance since the funds are offset through various mechanisms, without there being a deficit or a surplus. However, there may be a temporary imbalance when the funds received exceed or are less than the use of those same funds.