Importance of Balance of Payment


If you wonder What is Balance of Payment? Read it out here ( What is meant by Balance of Payment (BOP)) before you continue further.

Balance of payments data of home country and the host country is important to government officials, international business managers, investors, and consumers because such data influence and are influenced by other key macroeconomic variables such as gross domestic product (GDP), employment, price levels, exchange rate, and interest rates. Therefore the balance of payments may be used as an indicator of economic and political stability.

For example, if a country has a consistently positive BOP, this could mean that there is a significant foreign investment within that country. It may also mean that the country does not export much of its currency.

The Balance of payment of Manual is published by the International Monetary Fund (IMF). IMF is the primary source of BoP and similar statistics data worldwide. It prepares balance of payments manual and publishes the same in a Balance of Payments Year Book.
Monetary and fiscal policy must take the BOP into account at the national level. Multinational businesses use various BOP measures to gauge the growth and health of specific types of trade or financial transactions by country and regions of the world against the home country.

Businesses need BOP data to anticipate changes in the host country’s economic policies driven by BOP events. BOP data may be important for the following reasons:

  1. BOP indicates a country’s financial position compared to foreign countries, whereby a country’s ability to buy foreign goods or services.
  2. BOP is an important indicator of pressure on a country’s exchange rate, and thus on the potential of firm trading with or investing in that country to experience foreign exchange gains or losses. Changes in BOP may presage the impositions of foreign exchange controls.
  3. BOP data helps in knowing the changes in a country’s BOP may also signal imposition (or removal) of controls overpayments, dividends, and interest, license fees, royalty fees, or other cash disbursements to foreign firms or investors.
  4. BOP data helps to forecast a country’s market potential, especially in the short- run. A country experiencing a serious BOP deficit is not likely to import as much as it would if it were running a surplus
  5. BoP data can also signal increased riskiness of lending to a particular country.
  6. It also helps in the formulation of trade and fiscal policies.

These the importance of Balance of Payments. World Bank and IMF plays key roles in the relationship between countries.

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Author and Assistant Professor in Finance, Ardent fan of Arsenal FC. Always believe "The only good is knowledge and the only evil is ignorance - Socrates"
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