Importance of Balance of Payments as an Accounting Measure

Balance of Payments
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Balance of Payments
Introduction
Determining the quarterly/annually international monetary transactions is achieved by checking the records of economic exchange between residents of different countries (Frenkel, J. A. J. A., & Johnson, 1976). These records are known as the balance of payments/balance of international payments. Three accounts constitute the balance of payments. These include the capital account, the current account, and the financial account. While the current account quantifies the exchange of services and products, the capital account gauges the exchange of monies across borders. The financial account only records investments streams.
Importance of Balance of Payments as an Accounting Measure
It is necessary for investors to probe a country’s economically vulnerable sector to make an informed decision before investing in any nation’s resources. The productivity of an investment necessitates a scrutiny since some investments are not worth the risk (McCombie & Thirlwall, 2016). For instance, investing in the banking sector of a country’s whose financial scales are on the verge of collapse may not be worth the risk. This is because the nation could easily be declared bankrupt, thus curtailing the growth or even recovery of one’s initial capital.
The capacity of a nation is determined by its capability to sustain international trade. The balance of payments, therefore, is used to check whether or not a country’s export volume can be used to cater for its imports. International observers examine a country’s balance of payments to check if it has a deficit or surplus. In the case that the assets and the liabilities balance, the state’s balance of payments stands at zero. However, this is rarely the case. Most countries either have a debit or credit.
The measure of monies flowing into and out of the country may also be used to determine the vulnerability of the country to external blows (McCombie &Thirlwall, 2016). This shock attributes to the dynamic flows in the exchange markets. As such, researchers can draw market expectations and fundamental uncertainties from the balance of payments.
The Current Account
Marks the flow of goods and services into and out of a country, including its earnings on reserves and cash transfers. The exchange of goods and services, for instance, sales of raw materials like coffee beans and cotton, manufactured goods such as refined coffee and tea, services, including engineering works, copyright payments among others. These aspects constitute a country’s balance of trade (BOT), which carries the bulk of the balance of payment (BOP).
A deficit BOT infers an adverse BOP since the nation imports more than it can pay for. On the other hand, a surplus BOT gives a positive BOP. Another component of the current account is receipts from the assets fetching revenue, that is, stock dividends of a nation. Worker remittances constitute the current account. People working in other countries are often considered as sales of services since their salaries are sent back to their motherland (Ratha, 2005).
The Capital Account
Covers all the international cash tra...