It is the method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance. But in practice this is rarely the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming.
Various Aspects which a FinanceManager must take into accountwhile making Financial Decisions Trade Policy Changes. Promoting Exports and restricting imports. Exchange Rate Policy. Devaluation of currency, Hedging. Monetary Policy. Reserves by banks. Fiscal Policy. Diluting the inflation
Factors Affecting Balance of Payment Cost of Production. Demand and supply. Cost and availability. Domestic Business Policies. Trade Agreements. External Pressures.
Balance of PaymentDisequilibrium The balance of payment of a country is said to be in equilibrium when the demand for foreign exchange is equivalent to the supply of it. Disequilibrium occurs when there is either surplus or a deficit in the balance of payments. Deficit increases the demand for foreign exchange.
Types of Disequilibrium Cyclical Disequilibrium. Business Cycles. Elastic Demand for imports and exports increases constantly thus showing a surplus. Secular Disequilibrium. Bubble bursting. Structural Disequilibrium. It emerges on account of structural changes occurring in some sectors of the economy at home or abroad which may alter the demand or supply of import and export.
Temporary Disequilibrium. Temporary factors such as outbreak of war.Fundamental Disequilibrium. Persistent long run disequilibrium. Mainly because of deficits which exist continuously for long period of time. Unchecked series of short run disequilibrium.
Correcting Disequilibrium Monetary Policy- Restricting credit by increasing bank rates which raises exports & reduces imports Devaluation – Value of currency is reduced to make exports cheaper & imports dearer Exchange Control – RBI controlling the flow of foreign currency. Fiscal policy – Controlling the export promotion. Import duties & quotas.