DEFICIT AND SURPLUS IN BALANCE OF PAYMENTS

You have learnt that BOP accounting is based on the principles of double entry book- keeping, meaning thereby that for every credit entry, there is a debit entry. Thus, a BOP account always balances. The difference between aggregate debit and credits is called balance. In case, debits exceed credit, balance is negative or deficit, when the credits exceed debits, the balance is positive or surplus. Obviously, the term, deficits or surplus cannot then refer to the entire BOP but sub set of accounts included in BOP. 

Where value of exports exceeds imports, the situation is referred as trade surplus or surplus on trade account. Excess of imports over exports results in trade deficit on trade account. 

The transactions appearing in a balance of payments can be classified in two categories, via autonomous transactions and accommodating or financing transactions, Autonomous transactions take place on their own, in response to their felt needs and are independent of situation in the balance of payments. Accommodating or financing transactions refer to the flows which take place in response to surplus or deficit in the balance of payments. For example, a country may incur or raise its liabilities or reduce its assets in order to pay for the deficit. A deficit in balance of payment exists when payments for autonomous or self motivated transactions exceed receipts. In case, there is a deficit or surplus, there have to be some compensatory transactions to balance the imbalance.

Autonomous and financing transactions are also referred to as above the line ad below the line respectively. 

There are several concepts of ‘balance’ in balance of payments. These are: 

Trade Balance: This is the balance on the merchandise trade account, i.e. Item 1 in the current account. 

Balance on goods and services: This is the balance between the export and import of goods and services. It is the net balance on item I and sub-items 1-6 of item III taken together. 

Current Account balance: This is the net balance on the entire current account items I+ll+IlI. When it is negative we have a current account deficit, when positive, a current account surplus. 

Balance on current account and long term capital: This is also called basic balance. This is supposed to indicate the long term trends in BOP. 

While changes in reserve assets are accurately measured, recording of other items is subject to errors arising out of data inadequacies, discrepancies of valuation and timing, erroneous reporting etc. These are reconciled through a fictitious head of account called 'Errors and Omissions'.