Formula to Calculate Balance of Payments (BOP)

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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:

  • Firstly, the balance of the current account is determined which is the summation of the credits and debits on various merchandise trade. The current account deals with goods, which may include manufactured goods or raw materials that are purchased or sold. Then, the balance of the capital account is determined, which pertains to the disposal or acquisition of non-financial assets, including land or other physical assets. The products are required for manufacturing but have not been manufactured per se, for instance, an iron mine used for iron ore extraction. Now, the balance of the financial account is determined, which pertains to international monetary inflows and outflows related to investment. Finally, the formula for the calculation of BOP is by adding a balance of the current account (step 1), a balance of the capital account (step 2), and a balance of the financial account (step 3), as shown above.

Now, we will calculate the following values to calculate the BOP 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 calculate the BOP

  • 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 because it reflects whether the country has enough funds to pay for its imports. It also demonstrates whether the country has enough production capacity 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 exports goods/services. In such a scenario, the country is forced to borrow funds from other countries to pay off its imports. In the short term, such measures can fuel the country’s economic growth. However, in the long term, the country becomes a net consumer of the world’s economic output. Such a country will be forced to go into more debt to pay for its consumption instead of investing in its future growth prospects. If the deficit lasts for too long, 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, it means that the country exports more services, goods, and capital items than imports. 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 BOPBOPThe BOP (Balance of Payment) is a calculation of all payments and receipts of several products and services between one country and the rest of the world during a certain time period.read more can boost economic growth. This is because 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 become too dependent on exports in the end. In such a country, a large domestic market can guard the country against 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 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.

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

  • Calculate Current AccountCalculate Current AccountThe current account formula of the balance of payment measures the import and export of goods and services and is calculated as the sum of the trade balance, net income, and current transfers. Current account formula = (X-M) + NI + NTread moreTop 13 Best Financial Assets TypesTop 13 Best Financial Assets TypesFinancial assets are investment assets that derive their value from a contractual claim of what they represent. Cash and cash equivalents, accounts receivable, fixed deposits, equity shares, debentures/bonds, preference shares, mutual funds, interests in subsidiaries, associates, and joint ventures, insurance contracts, rights and obligations under leases, Share-Based Payments, Derivatives, and Employee Benefit Plans are all examples of financial assets.read moreFDINormative Economics