Balance of Payments Formula

Formula to Calculate Balance of Payments (BOP)

The formula for Balance of Payment is a summation of the current account, the capital account, and the financial account balances. The term balance of payments refers to the recording of all payments and obligations pertaining to imports from foreign countries vis-à-vis all payments and obligations pertaining to exports to foreign countries. It is the accounting of all the financial inflows and outflows of a nation.

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Source: Balance of Payments Formula (wallstreetmojo.com)

Step by Step Calculation of Balance of Payments (BOP)

Examples of BOP

Let us take the case of country A to calculate the balance of payments based on the given information and determine whether the economy is in surplus or deficit.

The following information is used for the calculation of the Balance of Payments.

Particulars	Amount
Current Account
Exports of Goods	$3,50,000
Imports of Goods	$4,00,000
Exports of Services	$1,75,000
Imports of Services	-$1,95,000
Capital Account
Net Capital Account Balance	$45,000
Financial Account
Net Direct Investment	$75,000
Net Portfolio Investment	-$55,000
Assets Funding	$25,000
Errors and Omissions	$15,000

Now, we will calculate the following values for the calculation of the Balance of Payments Formula.

The Balance of Current Account

• Balance of current account = Exports of goods + Imports of goods + Exports of services + Imports of services
• = $3,50,000 + (-$4,00,000) + $1,75,000 + (-$1,95,000)
• = -$70,000 i.e. current account is in deficitCurrent Account Is In DeficitCurrent Account Deficit refers to a scenario when the country’s total value of imported goods & services surpasses the value of exported ones. Generally, it is the outcome of high expenditure on imports compared to the money spent on exports. read more

Balance of Capital Account

• The balance of capital account =Net capital account balance
• = $45,000 i.e. capital account is in surplus

The Balance of Financial Account

• Balance of financial account =Net direct investment + Net portfolio investment + Assets funding + Errors and omissions
• = $75,000 + (-$55,000) + $25,000 + $15,000
• = $60,000 i.e. financial account is in surplus

Therefore, by using the above calculated value we will now do the calculation of Balance of Payments.

• Balance of Payments Formula = (-$70,000) + $45,000 + $60,000

BOP will be –

• The Balance of Payments = $35,000 i.e. overall the economy is in surplus.

Relevance and Use BOP Formula

The concept of balance of payments is very important from the point of view of a country because it is the reflection of the fact that whether the country keeps enough funds to pay for its imports. It also demonstrates whether the country has enough production capacity such that its economic output can pay for its growth. Usually, it is reported on a quarterly or yearly basis.

• If the balance of payments of a country is in deficit, then it means that the country imports more services, goods, and capital items than it exports. In such a scenario the country is forced to borrow funds from other countries in order to pay off its imports. In the short term, such measures can fuel the economic growth of the country. However, in the long term, the country ends up becoming a net consumer of the economic output of the world. Such a country will be forced to go into more debt to pay for its consumption instead of investment in its own future growth prospects. If in case the deficit lasts for too long, then the country might have to start selling off its assets to pay for its debt. Examples of such assets are land, natural resources, and commodities.
• If the balance of payments of a country is in surplus, then it means that the country exports more services, goods, and capital items than it does an import. Such a country and its residents are good savers. They have the potential to pay for all their domestic consumption. Such a country can even extend loans to other countries. In the short term, a surplus BOP can boost economic growth. They have enough savings to extend loans to those countries that buy their products. Consequently, the increase in exports can boost the production requirement, which means hiring more people. However, the country might end up becoming too dependent on exports in the end. In such a country, a large domestic market can guard the country against the impacts of exchange rate fluctuations.
• As such, the balance of payments enables analysts and economists to understand the strength of the economy of a country in comparison to that of the other countries. In addition, theoretically, the capital and the financial accounts should be balanced against the current account i.e. BOPs should be zero; but that seldom happens.

Recommended Articles

This has been a guide to the Balance of Payments Formula. Here we learn how to calculate BOP using its formula along with some practical examples and downloadable excel templates. You may learn more about Financial Analysis from the following articles –

• Calculate Current Account
• Top 13 Best Financial Assets Types
• FDI
• Normative Economics