Balance of Payments: Definition, Functions, Objectives, and Components

Balance of Payments Definition, Functions, Objectives, and Components

Nikereact.org – Exports and imports of goods are not the only economic transactions that Indonesia carries out with other countries. Indonesia also exports and imports services, such as insurance, tourism, and transportation. The most important thing in export and import transactions or other transactions is that they must be recorded in the balance of payments.

Recording of all economic transactions with the balance of payments needs to be done in order to make it easier for a country to analyze domestic goods or services favored by other countries so that it can increase state income.

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Not only that, with the balance of payments, a country can evaluate the deficiencies that need to be corrected in economic transactions between countries.

What is a balance of payments? Check out the explanation of the balance of payments starting from the understanding to the components of the balance of payments.

A. Definition of Balance of Payments

Balance of Payments Definition, Functions, Objectives, and Components

The balance of payments (BOP) is a systematic record of all economic transactions carried out by a country with other countries in the form of trade in goods and services, financial and monetary transfers between Indonesian residents and foreign residents for a certain period. .

Meanwhile, in the Big Indonesian Dictionary (KBBI) balance of payments means the comparison of money receipts between two countries (in world trade); a detailed list of estimates of trade transactions held by countries over a certain period of time.

In simple terms, the balance of payments is a systematic record of economic transactions (international trade) carried out over a period of time.

B. Balance of Payment Transactions

In Indonesia, balance of payments transactions are grouped into three, namely current transactions, capital transactions, and financial transactions. Each transaction has its own role. Consider the explanation of the three types of balance of payments transactions as follows:

1. Current transaction

Current transactions are transactions related to exports and imports in the form of goods and services within a period of one year. The current account consists of the trade balance (goods transactions), service transactions, primary income, and secondary income. However, in general, the current account is used to assess or measure the trade balance.

a. Goods transaction

Goods transactions include export and import transactions of goods classified into oil and gas and non-oil and gas. Due to the process of receiving payments, all exports of goods are included in credit transactions. Meanwhile, imports of goods are included in debit transactions because they cause payment obligations to other countries.

In foreign investment, if the export value exceeds the import value, the country will experience a trade balance surplus or get a positive (+) result. However, if the value of imports exceeds the value of exports, the country experiences a trade balance deficit or loss because it has a (-) reduction.

b. Service transaction

Service transactions include the provision of services by Indonesian residents to foreign residents (exports) and foreign residents to Indonesian residents (imports). International transportation and travel are part of the service transaction.

c. Primary income

Primary income consists of receipts and payments. While the primary income itself can be interpreted as the acquisition or results derived from the provision of factors of production, labor and financial capital. Primary income includes dividends (coupons, discounts, interest).

d. Secondary income

Secondary income consists of receipts and payments. Included in secondary income are income transfers or remittances for foreign workers/TKI and other transfers (gifts, grants, services, money)

2. Capital transactions

Capital transactions are usually used to record the net results obtained from transactions of capital expenditures and income. Capital transactions consist of fixed assets and investment grants. Most of the capital transactions are in the form of capital transfers.

Capital transactions have less contribution in the balance of payments so that these transactions are not used very often. Capital transactions have two elements, namely capital transfers and non-financial non-production assets.

Capital transactions are calculated by adding up the net value obtained from capital transfers and non-produced non-financial assets. Then, the credit side is represented by capital inflow transactions, meanwhile, the debit side is represented by capital outflow transactions.

3. Financial transactions

Financial transactions are transactions that notify changes in ownership of foreign financial assets and liabilities within one period. The categories in financial transactions are direct investment, portfolio investment, financial derivatives, and other investments. For more clarity, see the explanation of the categories of financial transactions as follows:

a. Direct Investment (Direct Investment)

Direct investment is an investment made by investors by investing their capital with the aim of investing in the long term in an Indonesian or foreign company. The capital that should be invested is quite large, around 10% of the company’s total capital.

b. Portfolio Investment (Portfolio Investment)

Portfolio investment is an investment whose profits are obtained from investments in securities. This investment is short term.

c. Financial derivatives

Financial derivatives are documents containing the recording of derivatives obtained from financial instruments which include options (warrants) and other derivatives (forwards, futures, and swaps).

d. Other investments

Included in other investments are all types of finance that do not fall into the previous three categories. On the liability side, most other investments include foreign loans, be it government or private, and trade credits obtained from exporters of goods and services abroad.

Meanwhile, on the asset side, other investments are in the form of resident deposits held in foreign banks and trade receivables from Indonesian exporters to overseas buyers.

C. Types of Balance of Payments

Basically the balance of payments consists of debits and credits. In the balance of payments, credit serves to record all transactions that generate foreign exchange or provide bills to foreign countries.

Meanwhile, debit serves to record all transactions related to the reduction in the amount of foreign exchange due to. Reduction of the amount of foreign exchange that exists on the debit is obtained from payments or those that give rise to debts to foreign countries.

The balance of payments is divided into three types, namely the balance of payments deficit, the balance of payments surplus, and the balance of payments balance. The following is an explanation of the three types of balance of payments.

1. Balance of Payments Deficit

The balance of payments deficit is a balance that indicates that the value of imports is greater than the value of exports. If a country continues to run a deficit, the financial sector will run slowly so that economic growth is difficult to develop.

“How to solve the deficit problem?” Limiting imported commodities and increasing export commodities are two ways that can be used to overcome deficit problems in a country. In addition to limiting imported commodities, the government needs to expand the export market so that export commodities increase.

However, to increase export commodities is not easy because it still depends on the amount of domestic production as well as looking at foreign demand. This foreign demand is influenced by the quality of goods, the price level, and the prevailing exchange rate.

As for the ways that can be done to increase export commodities, namely diversifying exports, export subsidies and premiums, devaluation, controlling domestic prices, and international agreements.

2. Balance of Payments Surplus

The balance of payments surplus is a balance that indicates that debit transactions or the amount to be paid abroad is smaller than receipts from abroad (credit transactions). In simple terms, a balance of payments surplus can be interpreted as the amount of income is greater than the amount of expenditure made by a country.

The surplus that occurs in the balance of payments indicates that the country has more foreign exchange reserves and funds. In other words, the funds in the surplus balance of payments can be used to carry out national development in a country.

4. Balance of Payments Balance

A balanced balance of payments is a balance that shows that foreign payment transactions (debit transactions) are equal in number to receipts from abroad (credit transactions). If a country wants to increase its income (surplus), it is necessary to reduce the value of imports while increasing or increasing the value of exports.

To better understand the basics and matters related to import-export activities, the Ins and Outs of Import-Export Trade Volume 2 discusses various things you should know.

D. Balance of Payments Function

Conditions of incoming and outgoing funds that occur in the balance of payments can indicate that the balance of payments is functioning properly. It is important for a country to pay attention to economic transactions so that they run properly and even try to move in a profitable direction.

Thus, the balance of payments has several functions. The balance of payments functions include:

  • As a government material in making decisions in the field of international trade.
  • As a government material in making decisions or monetary policies implemented by a country.
  • As a tool to measure or assess the economic conditions associated with international economic transactions of a country.
  • As international financial data.
  • As a means of collecting data on economic transactions so that the government of a country when carrying out export and import activities does not experience losses and can make timely payment settlements.
  • As a tool to record the budget to be issued in international transactions

E. Purpose of the Balance of Payments

The preparation of the balance of payments carried out by a country has its own objectives. Each goal will always provide benefits for a country. The objectives of the preparation of the balance of payments are as follows:

1. To know the state of the economy in the international relations of a country

To observe the state of the economy of a country can use the balance of payments. With the balance of payments, the general pattern of a country’s economy can be known so that economic transactions can be carried out optimally.

In international transactions, a country really needs to know the current state of the economy of another country. By knowing this situation, the domestic government can determine policies or steps that must be taken so that when carrying out economic transactions they get profits.

2. To Find Out The Resources In Each Country

The resources owned by a country are different. Therefore, a country needs to know the resources owned by other countries in order to establish relations in international trade. The income generated from international trade can be used as the country’s foreign exchange reserves and run the domestic economy.

The resources owned by a country can be known by using the right balance of payments. If you already know the resources owned by other countries, the government of a country can determine what kind of economic transactions should be carried out.

4. To find out the amount of foreign exchange budget needed in international economic transactions

Foreign exchange reserves owned by a country can be used as international economic transactions. In order for foreign exchange reserves to increase, international economic transactions must be carried out effectively and efficiently so that they can be obtained from these transactions.

Planning the foreign exchange budget must be done carefully and thoroughly so that there are no mistakes that make a country short of a foreign exchange budget. One of the tools that can determine the foreign exchange budget is the balance of payments. With a balance of payments, international economic transactions can be carried out effectively and efficiently so that a country does not suffer losses.

5. To know the steps to be taken in the field of economic transactions

In order not to take the wrong steps when conducting economic transactions, the government of a country needs to think of appropriate steps so that the country does not experience losses when conducting economic transactions.

Therefore, a country must have a balance of payments in order to obtain data on the economic development of other countries. These data will be useful for the government of a country because having accurate data will produce the right policies.

6. To find out the domestic economic problems that exist in a country

A country must also pay attention to economic problems that exist in the country. If there are problems in the domestic economy and it is not resolved immediately, it could disrupt international economic transactions.

Domestic problems can be identified through the balance of payments. The records in the balance of payments are accurate data so that the government will immediately know about domestic economic problems and solve them immediately.

Components of the Balance of Payments

The components in the balance of payments are divided into five balance groups, namely:

1. Trade Balance

The trade balance is a data related to the comparison of the value of exports with the value of imports of a country that occurs in one period.

2. Capital Traffic Balance

The capital traffic balance is a record in the balance sheet that records every loan from abroad or credit as well as loans or credits given to other countries.

3. Monetary Traffic Balance

The monetary traffic balance is a record in the balance sheet that records changes or growth in foreign exchange reserves in a country.

4. Capital Yield Balance

The capital gains balance is a record in the balance sheet that records all payments and receipts of dividends, various kinds of gifts given by other countries, and interest on salaries of foreign workers.

5. Service Balance

The service account is a record in the balance sheet that records service transactions carried out by a country and received by other countries during a period.

Conclusion

The balance of payments is very important for a country to have because with the balance of payments a country can measure the amount of funds flowing from abroad, both outgoing funds and incoming funds. The entry and exit of funds in international economic transactions indicates that a country’s financial sector is running properly. The balance of payments can be an indicator that influences the actions of market participants.

Transactions recorded in the balance of payments are only international economic transactions, such as exports and imports. Meanwhile, military aid transactions or similar transactions are not recorded in the balance of payments.

Economic transactions include debit transactions and credit transactions. Debit transactions are transactions that must be paid abroad. Meanwhile, credit transactions are transactions received from abroad.

Well, that’s a brief explanation of the meaning, function, purpose, and components of a Balance of Payments that can help  know and know more about what a Balance of Payments is and its importance for a country.

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