Balance of Payments:
The principle tool of analysis of the monetary aspect of international trade is the balance of international payment statements. The balance of international payments or simply the balance of payments of a country is a systematic record of all international economic transactions of that country during a given period, usually a year. In other words, the balance of payments statements is a device for recording all the economic transactions within a given period between the residents of one country and the rest of the world ( the residents of other countries).Transactions entered on the balance of payments are of course international transactions constituting the transfer o assets and liabilities, the creation or the reduction of claims or the receipts and payments of funds which take place between the residents of one country and those of other countries.
Balance of payments accounting of any country uses a double entry system of recording accounts with the rest of the world. Thus, the balance of payments account is divided into transactions giving rise to payments (or debit) and receipts (or credit).All international transactions that result in payments in India (receipt to India), for instance, increase India’s stock of, or claims on, foreign currencies, and may be recorded as credit (or plus) entries in India’s balance of payments. Conversely, all payments by India (receipts to foreigners) deplete India’s stock of or claims on, foreign currencies, and may be recorded as debit (or minus) entries in the balance of payments account.
However, the balance of payments account should not be confused with the conventional accounting balance sheet or ‘profit and loss’ statement of a firm. A balance sheet shows assets and liabilities at a particular time, whereas a balance of payment account groups transactions during a year. However, a country’s real economic gain or loss from international trade or transactions cannot be expressed...