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What are Balance of Payments?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 December 2016
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A balance of payments is a strategy used to analyze the relationship between money that is flowing into a country and money that is going out of that same country. Keeping this type of record makes it possible for nations to determine if the current balance between imports and exports is acceptable, or if some steps should be made to regulate the process in order to achieve a trade balance that is more favorable. In most cases, a balance of payments is compiled for either a calendar year or the fiscal year recognized by a particular national government.

Just about every major type of commerce is included in the calculation of a balance of payments. The movement of precious metals, such as gold and silver, are a key part. Commodities like corn and wheat are also usually included. Imports and exports of petroleum products are considered essential components in most countries. In nations where tourism is a major source of revenue, the amount of money spent by tourists abroad and within the country will also be accounted for.

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The actual structure of a balance of payments is relatively simple. Using basic accounting methods, receipts that come into the country from any source are identified as credits, or positive numbers. Any revenue that flows out of the country is identified as a debit, and is shown as a negative number. The balance of payments is determined by deducting the negative numbers from the positive numbers, thus arriving at a single number that represents that time period. Ideally, the comparison of the debits and credits for a given period will show that the nation is taking in more revenue than it is spending outside its borders.

However, it is important to note that what is considered a healthy balance of payments may vary from one country to another. This can be due to a number of factors, such as the amount of natural resources found within the country, the importance of certain industries that operate within the nation, and what goods and services are exported regularly. Local financial experts can weigh all the relevant factors and determine what type of ratio between the debits and credits is considered healthy for a particular nation.

Understanding the balance of payments for a given period of time can be very helpful when it comes to planning for the needs of a nation over the next several years, or even the next several decades. The process of calculating this balance can often call to attention various trends that may or may not be favorable to the welfare of the nation at some point. By analyzing all the available data and identifying these trends, it is possible to begin taking steps to minimize their impact, and initiate various strategies that will help keep the country’s economy in a relatively beneficial position.

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candyquilt
Post 1

The balance of payments includes a lot of foreign transactions and use of different currencies.

Does the exchange rate of currencies and reserves of foreign exchange have any impact on the balance of payments then?

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