BALANCE OF PAYMENT
The balance of trade of a nation does not truly reflect its overall international economic and business conditions. It is quite possible that a country may have unfavorable balance of trade but favorable balance of payment. Hence to determine correct economic position it is necessary to know balance of payment since it reflects a better and truer picture of an economy.
Balance of payment is an income and expense account of a country during a given period. It includes all flow of goods, services (visible and invisible items), current account and capital account items. It gives a complete and detailed account and record of all types of imports and exports in the light of which a nation formulate its economic, industrial, and business policies greatly affecting its foreign trade and determines or adjusts foreign exchange rate of its currency. If a country’s foreign receipts are greater than payments the balance of payment will be favorable, and if receipts arc less than payments, the balance will be unfavorable (negative). The continuous negative balance of payment may cause devaluation of the currency in an effort to bring the balance favorable. On the other hand, consistent and stable favorable balance may call for upward revaluation which is a rise in the value of a currency in the foreign exchange market.
To figure out the nature of the balance of payment the flow of following items is taken into account;
Imports and exports of goods and services, short-and long-term foreign loans, aids, gifts, medical, educational, and hotel services, experts’ fees, interest incomes and expenses, foreign visits and tours of tourists and government delegations.
The outflow of foreign exchange brings negative balance and the inflow positive or favorable balance of payment. The details of items included in the balance of payment are shown in the following chart.