Question (by rs rs)
Can someone explain to me why BOP must
always balance but it does not guarantee BOP equilibrium? any econs
student can help?
Answer
Hi rs rs,
When your "A" level
economics lecturer says that BOP must always balance, he/she is
actually referring to the accounting BOP balance.
In accounting, when a
company buys goods for sale using cash, it will be recorded in the
accounting books as debit purchases and credit cash. For every
transaction, there will be a debit entry and a credit entry.
At the end of
accounting year, the accountant will prepare a statement known as a
trial balance. The trial balance will total up the values of all
the debit entries and all the credit entries and if there is no
mistake in recording every transaction, the total debit value will
be equal to the total credit value. When this happens, the
accountant says that the account is in balance ie all debit
value = all credit value
Similarly, when a
country buys goods from abroad ie imports, the country needs to
exchange its local currency for the foreign currency to buy the
imports, so the country official reserves of foreign currency will
decrease. This will be recorded as debit imports and credit
official reserves.
Similarly, at the end
of the government year, the government statistician will total up
the values of all the debit entries and all the credit entries and
if there is no mistake in recording every transaction, the total
debit value will be equal to the total credit value. When this
happens, the accounting BOP statement is said to be in balance
ie all debit value = all credit value.
However, the
term BOP balance is used differently in newspapers, news, economics
and finance.
BOP balance can be positive, zero or
negative
Positive BOP balance (commonly known as BOP surplus)
means the country's international receipts are more than its international payments arising out of its
international transactions ie imports, exports of goods and
services, unilateral transfers, capital inflow and outflow. The
excess/surplus of international receipts over international
payments increases the country's official reserves of foreign
currencies.
Zero BOP balance
(commonly known as equilibrium BOP) means the country's
international receipts are equal to its international payments arising out of
its international transactions ie imports, exports of goods and
services, unilateral transfers, capital inflow and outflow. No
excess/shortage of international receipts over international
payments leaves the country's official reserves of foreign
currencies unchanged.
Negative BOP balance (commonly known as deficit BOP)
means the country's international receipts are less than than its international payments arising out of its
international transactions ie imports, exports of goods and
services, unilateral transfers, capital inflow and outflow. The
shortage/deficit of international receipts over international
payments decreases the country's official reserves of foreign
currencies.
Thank you for your
kind attention.
Regards,
ahm97sic