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What is the full form of BOP?
Introduction
BOP or Balance of Payment is the receipt or record made by the residents of a particular country that involves all international financial transactions.
When two or more countries are in an export-import business, they keep a BOP for various reasons. BOP is the process of monitoring the financial transactions between countries. It is an important part of large businesses and organizations as it involves huge amounts of money. Each country is required to have a BOP which will help them estimate and allocate money. The BOP involves all the financial statements between different countries, government anatomies, or private sectors.
What Is the Full Form of BOP?
The full form of BOP is the balance of payments. In international economics, it is a method of monitoring monetary transactions within a specific period. This financial transaction is calculated systematically by several countries in every calendar year. The BOP accounts for all the export and import controlled by public and private sectors to determine how much money the country sends and receives.
If money is spent, the transaction is known as debit; if the money is received, it is called credit. Apparently, the BOP should be balanced, meaning the credit (asset) and debt (liabilities) should be the same. But this is rarely the case.
Types of Balance of Payment
The BOP comprises three main categories: financial account, capital account, and the current account, and each of their accounts for several international monetary transactions.
The Current Account − It shows the mark of the outflow and inflow of services in a country. The profit on various investments, in public and private sectors, are enumerated in the current account.
In every current account, one can find debits and credits of the goods’ trade like manufactured products and raw materials, which are brought or sold. Services include receipts of tourism, engineering, transportation levies, royalties from copyrights/patents, etc. All these create a country’s balance of trade, the biggest bulk of its balance of payments.
Capital Account − A capital account is where one can find all the international monetary transactions. It is the disposal or acquisition of non-financial assets (such as land) and non-produced assets used for production, like a mine for extracting diamonds.
It is further divided into the transfer of goods and the monetary flows coming out from debt forgiveness. It also includes the financial assets of migrants, the transfer of ownership on fixed items (assets like equipment used for production), the transfer of funds received, death levies, gifts and inheritance taxes, uninsured damages, etc. All these financial assets contribute to the capital account, which will carry a credit balance.
Financial Account − This is a very volatile balance of payment; hence it should be maintained very carefully. It is established based on the investments made by foreign countries for the purchase of securities. These securities include international transactions related to investments in businesses, bonds, real estate, etc.
It also includes assets owned by the government, including gold, foreign reserves, private properties held abroad, direct foreign investment, special drawing rights held with the IMF, etc. All these monetary flows are documented in the financial account. In addition, private foreigners’ and officials’ owned assets are also recorded in the financial account.
Importance of Balance of Payment
With the advent of the emerging market with international import and export business, BOP spurred in many developing nations. This helps them manage monetary transactions and have a clear vision of the flow of funds. Here are some of the advantages of BOP, which will help you understand its significance.
BOP is crucial because it helps you understand the state of a country. If the balance is positive in the current account of BOP, it means that the country is exporting more than it is importing.
BOP helps to measure the currency, whether it will depreciate or appreciate. For example, if the current account is a deficit, it imports more than exports. So more currency is used for importing, resulting in the falling currency.
By studying the account of BOP, the government can determine which sector is flourishing and which one is lagging behind. If a sector flourishes, then the export will increase exponentially.
If the BOP is facing a deficit year after year, then there will not be enough stock to support the deficit. In such cases, the government has to borrow money from other nations.
If too much import is taking place in the country, it will generate the result in BOP. The government can study the accounts and put measures to help that sector minimize the import.
If the record of BOP shows a surplus of the stock and the sector is flourishing, it means that the government can also lend money to other nations in need.
Conclusion
BOP is a method of collecting monetary transaction records of a specific period and documenting them. This helps the countries measure all the international monetary transactions and take certain decisions which can benefit them. The BOP consists of three accounts, current account, capital, and financial. The current account is supposed to balance with the capital and financial account, but it rarely does.
FAQs
Q1. How does the BOP affect the economy of a country?
Ans: The statement of BOP will help the country determine whether its currency value is depreciating or appreciating. It further helps the government to take necessary actions to maximize export and minimize imports in the country.
Q2. What are non-financial assets in the BOP?
Ans: The non-financial assets in the BOP can be tangible assets like real estate, machinery, vehicles, purchased goodwill, patents, and intellectual properties.
Q3. What happens when BOP doesn’t balance?
Ans: It’s completely normal if the BOP doesn’t balance. However, if the international exchange stock declines, a country’s BOP will be in deficit or disequilibrium.
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