Economy

Balance of payments

The balance of payments is the mechanism through which all financial transactions carried out at the international level by a country's residents are recorded. This very important mechanism is in charge of telling them if savings are made sufficiently apt to be able to pay for the imports that are made. In addition, it helps to show if the country is producing enough economic income to be able to pay for its growth. The balance of payments should be reported either quarterly or annually. A balance of payments deficit means that the country imports more goods, services and capital than it exports. When this is the case, the country must borrow money from other countries in order to pay for all its imports.

What is the balance of payments?

It is the relationship between the amount of money that a country must spend buying abroad and the amount of money it earns selling its products to other countries and involves goods and services, as well as different capital.

About the balance of payments

The balance of payments consists of establishing the relationship between the money that a country spends in other countries buying goods and services and the amount of money that other countries spend on it. All transactions involving trade, goods, services and a country’s capital must be recorded in it for a specific period of time. It is a way of measuring the equilibrium between income and expenses in the long term with the aim of trying to maintain a stable economy and avoid debts. It then consists in the recording of all types of international economic transactions that a country carries out, usually in the period of one year.

Balance of payments characteristics

Among its main characteristics we can mention the following:

Aims and objectives

The main objective of the balance of payments is to provide detailed information with respect to all transactions conducted internationally. It also seeks the best way of correcting and repairing payment deficits by means of a controlled increase in exports and a decrease in imports, which in turn requires government controls.

Structure

The balance of payments is structured in four different parts:

Types

Analysis

It can be analyzed by means of a vertical one, which involves the formation of accounting entries to reflect a periodic flow statement to observe profits and losses. Its purpose is to give references if the fund movements were created by current or capital transactions.

Equilibrium

A balance is sought between the transactions that are carried out independently so that if the balance of the trade balance is zero, an external balance is produced.

Importance of the balance of payments

It is important because it reflects an appropriate balance between a country’s finances, financial statements and economy. It reflects payments and liabilities abroad and is one of the main indicators of the situation of a given country with respect to international trade, with net capital outflows.

Examples

Written by Gabriela Briceño V.
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