What is meant by the balanceofpayments Make sure to illustra

What is meant by the balance-of-payments? Make sure to illustrate your understanding of the concept by providing a thorough explanation with an example

Solution

Balance of payment refers to measure the value of a country\'s position that whether is it balanced or not. It has two components: autonomous and accomodating. In the first part there are two components, i. current account, ii. capital account. In the current account there are two parts, exchange of goods and exchange of services. Both comprise the value of export and import. Import is denoted by (-)ve sign and export by (+)ve sign as import(m) is leakage and export(x) yields earnings. If total import equals export in current account then, it is balanced, if m>x then current account is in deficit and if m<x then it is in surplus. Again for the capital accounts we deal with financial assets. By similar process we measure whether capital accounts is in balance, deficit or in surplus. Ultimately, summing up the capital and current account we see whether a country\'s balance of payment is in balanced or in surplus or deficit. If they are not in balance then, accommodating items, i.e. errors and ommissions play an important role to make the imbalance situation to get into balance.

Examples: Current account: exchange of goods-say, U.S export/import any commodity to UK;

exchange of services-worker of CTS goes to U.S from India for the purpose of job and vice-versa;

capital account-a person of U.S holds a bond in UK.