Balance of payments is a systematic record of official estimates of all international economic transactions of the country during a year. It is an economic para meter rejecting country’s international financial position as well as its position of the external sector.
In more specific terms, the Reserve Bank of India defines the balance of payments of a country as a systematic record of all economic, transactions between the ”residents’ of a country and the rest of the world.
It presents a classified record of all receipts oh account of goods exported, services rendered and capital received by ‘residents’ and payments made by them on account of goods imported and services received from the capital transferred to ‘non-residents’ or ‘foreigners.’
In economic analysis, the term Balance of Payments (BoP) is a very useful and meaningful concept. The concept of BoP is used in two sense: simple and analytical. In a simple or narrow sense, the term of balance of payments is used to the systems of accounts relating to a country’s international economic transactions.
In a broader or analytical sense, the term balance of payments used to express the relationship between the effective demand for and supply of a country’s currency. A deficit in the balance of payments suggests that demand for the country’s currency is less than its supply in the foreign exchange market. Similarly, surplus BoP implies that the demand is in excess of supply.
This kind of analytical interpretation of the BoP helps in examining such questions as: exchange rate policy, the relationship between interval and external equilibrium and alternative methods of correcting BoP disequilibrium.
India’s balance of payments (BoP) is classified into two categories: (i) BoP on current account, ad (ii) BoP on capital account. The BoP on current companies: (a) Merchandise or visible trade,
1. e., exports and imports; (b) Invisible items: Receipts and payments for services like shipping, banking, insurance, travel, etc.; and (c) Unilateral transfers such as donations. The BoP on current account indicate surplus/deficit in the balance of payments for the current year. The BoP on capital account reflects the implications of surplus/deficit on current account on the country’s foreign exchange reserves and its international financial status, i.e., strength a weakness of external debt position.