Importance Of The Balance Of Payments

Balance of Payments Students Name Institutional Affiliation The balance of payments records the outflow and inflow of assets within a given country. It consists of the capital, current, and financial accounts. These accounts have various components, as discussed below. It is the role of the government to impose control on some of the activities that determine the position of the BOP. The US trade deficit pays a role in determining the exportation and importation capacities of its citizens. Importance of the balance of payments. The balance of payments plays an important role in helping nations to determine their short-term international economic prospects. This includes the measure of the amount of money flowing in the country through exports and that flowing out of the country through imports. As a result, such a measure would determine the chances of the vulnerability of external blows to the financial situations of a nation (Kyle, 2015). In addition, through the dynamic flows of the exchange market, economists are able to predict market expectations and the various uncertainties regarding the balance of payments. In addition, the economic well-being of a nation is highly determined by its capacity to sustain and participate in international trade. This is an indication that the balance of payments helps the accounting system in analyzing whether the country’s export volume is sufficient enough to cater to its import's expenses. The balance of payments can either have a surplus or a deficit. A surplus occurs in the case whereby the country's volume of exports exceeds the volume of the imports. A deficit occurs whereby the nation's imports exceeds what they export to other nations. Therefore, in the case whereby a balance is achieved between the liabilities and the assets, the balance of payment stands at zero. This condition is rarely achieved, and most of the countries either have a surplus or a deficit. In addition, the balance of payments helps investors in analyzing a country's economic vulnerabilities before deciding to invest in any of the nation's resources. Some of the investments might turn out not worth risking an individual's money. For instance, in the case of a nation whose financial situation stands at a risk of collapsing, then it would not be wise to invest in its banking sector (Stern, 2017). Such a country could become bankrupt hence making it difficult to recover an individual's initial investment capital. Therefore, the balance of payments is an important accounting measure that determines the economic well-being of a nation, both locally and internationally. The current account The current account is used to mark the volume of inflow and outflow of goods and services in a country. It also includes an indication of the country's earnings on cash transfers and reserves. Activities such as the exchange of goods and services, copyright payments, and the sales of raw materials and manufactured goods contribute to the country's balance of trade. This balance of trade is an important component of the balance of payments. A deficit in the balance of trade indicates a similar deficit in the balance of payments since the country's import volume is more than what they can pay for (McCombie & Thirlwall, 2016). As w...