[Commerce Class Notes] on Balance of Payment Pdf for Exam

The balance of payment is an important concept in the study of commerce and economics. The balance of payment is discussed very briefly in Chapter 6 called Open economy macroeconomics of the NCERT book of Class 12, this chapter is prescribed by the Central Board of secondary education and it holds significant weightage in the board examination that is held by the CBSE.

The study material on , on the topic balance of payments, explains the complex concepts in a simplified language. It explains in detail what a balance of payment is, what are the inflow and outflow of foreign currencies, the types of balance payment accounts, The importance of balance of payment. Other details about the balance of payments can be accessed by visiting ’s website, gives a comprehensive understanding of the topic, the study material provided by is a product of intensive research and planning, the study notes are up-to-date and contain all the minute details that are important for the understanding of a particular concept.

What is an Open Economy

An open economy is an economy that has a trading relationship with other nations in goods and services or financial assets. For example, Indians like to use products from foreign countries and therefore some of the production is also exported to other foreign countries therefore foreign trade is responsible for influencing Indian aggregate demand.

In an open economy, it is important to have a balance of payments as it records the transactions made in goods, services and also the assets between residents of a country with the rest of the world, the balance of payments records transactions for a specified time period which is typically a year. In simple words a bop can be defined as a record which contains a summary of all the transactions undertaken by the firms, government institutions, individuals of a country with the firms, government institutions, individuals of other foreign countries.There are three types of payment accounts in a balance of payment or BOP, That are – current account, capital account, and finance account. Transactions taken up by net trade in goods and services, net transfer payments, net earnings on cross border investment are all recorded in the current account. The capital account is responsible for recording the transactions of a nation’s financial instruments and central bank reserves. Finance account deals with all the transactions which include ownership change for foreign assets between a nation’s residents and non-residents.

Importance of Balance of Payment

The importance of Balance of Payment account can be gauged from the following pointers –A financial record such as the BOP analyzes all the transactions under any nation’s economy regarding goods and services’ exports and imports and other finances for a financial year.The BOP helps the government to identify the various sectors in its economy, which possess the potential for export-oriented growth.With the help of the BOP, the government can implement higher tariffs and tax rates on the inflow of foreign exchange to encourage domestic industries to become more self-sufficient and minimize non-essential items’ import.If a nation possesses a flourishing export trade, its BOP can provide the government with accurate details so that it can adopt measures like currency devaluation to let its goods and services be availed at affordable rates and thereby improve foreign exchange outflow exponentially.Another important reason why a BOP account is essential for an economy is that it is a major indicator for a government to formulate its standards on monetary and fiscal policies, control of inflation, etc. Students can gain a more in-depth idea about Balance of Payment with study materials provided by online. Check out available study material and online classes today for better exam preparations.

Key Components that are studied in Relation to the Balance of Payments-

• BoP Surplus and Deficit

• The Foreign Exchange Market

• Determination of the Exchange Rate

• Flexible Exchange Rates

• Fixed Exchange Rates

• Managed Floating

• The determination of income in an Open Economy

• National Income Identity for an Open Economy

• Equilibrium Output and the Trade Balance

• Trade Deficits, Savings And Investment