Do you concur that the “Balance of Payments always balances”?
Do you agree with the statement “Balance of Payments always balances” Comment.
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Do you concur that the “Balance of Payments always balances”?
Comment on "Balance of Payments Always Balances"
The statement "Balance of Payments always balances" is technically accurate but requires context to understand its implications. The Balance of Payments (BoP) is a record of all economic transactions between residents of a country and the rest of the world in a specific period. It consists of two main accounts:
Current Account: Records trade in goods and services, income, and current transfers. It shows the net amount of a country's income if it is in surplus, or spending if in deficit.
Capital and Financial Account: Records all transactions involving financial assets and liabilities and capital transfers. It includes investments, loans, and banking transactions.
The BoP is always balanced in an accounting sense because every transaction is recorded twice: once as a credit and once as a debit. However, this doesn't mean that all its components are in surplus or deficit. A deficit in the current account, for example, must be offset by a surplus in the capital and financial account, or vice versa. The balancing item, often called "errors and omissions," accounts for discrepancies due to measurement issues or unrecorded transactions.
In practical terms, persistent imbalances, like a current account deficit financed by foreign borrowing in the capital account, can indicate underlying economic issues that might not be sustainable in the long run.