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

Get to know the meaning of the balance of payments – Export and import activities of goods
are not the only economic transactions carried out by Indonesia 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 it 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.

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

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

A. Definition of Balance of Payments

The balance of payments ( BOP) is a systemic 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 residents abroad during a certain period. .

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

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

B. Balance of Payment Transactions

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

1. Current transactions

Current transactions are transactions related to exports and imports in the form of goods and services
within 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 transactions

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, the import of goods is included in a debit transaction because it
creates payment obligations to other countries.

In foreign investment, if the export value exceeds the import value then 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 will experience a trade balance deficit or loss because it has a reduction
(-).

In order to better understand export-import administration activities, Sinaumed’s can use the book Export-Import:
Theory and Practice of Export-Import Activities for Logistics and Business Practitioners as a reference.

b. Service transactions

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 service transactions.

c. Primary income

Primary income consists of receipts and payments. Meanwhile, primary income itself can be
interpreted as an acquisition or result derived from the provision of labor production factors and financial
capital.
Which is included in the primary income in the form of dividends (coupons, discounts,
interest).

d. Secondary income

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

2. Capital transactions

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

The capital transaction has less contribution to the balance of payments so that this transaction is not
used very often.
Capital transactions have two elements, namely capital transfers and
non-production non-financial assets.

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Capital transactions are calculated by adding up the net value obtained from transfers of capital 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, namely direct
investment, portfolio investment, financial derivatives, and other investments.
For a clearer
view, 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 which aims to invest 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 investing in securities.
This investment is short term.

c. Financial derivatives

Financial derivatives are documents containing the recording of derivatives obtained from financial instruments
including options ( warrants ) and other derivatives ( forward, future, and swap ).

d. Other investments

Included in other investments are all types of finance that are not included in the three previous
categories.
On the liability side, most other investments include foreign loans, whether
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 in overseas banks and trade
receivables from Indonesian exporters to overseas buyers.

Sinaumed’s can find an in-depth discussion of export-import activities in the form of how to implement service
quality with business partners, and various other topics in the book The Ins and Outs of Export-Import Trade
Volume 3.

C. Types of Balance of Payments

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

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

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

1. Balance of Payments Deficit

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

“How to solve the deficit problem?” Restricting imported commodities and increasing export
commodities are two ways that can be used to overcome the deficit problem in a country.
In
addition to limiting imported commodities, the government needs to expand export markets 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, price levels, and the prevailing exchange rates.

The ways that can be done to increase export commodities are export diversification, export subsidies and
premiums, devaluations, controlling domestic prices, and international agreements.

2. Balance of Payments Surplus

A surplus balance of payments is a balance indicating that a debit transaction or amount to be paid abroad
is less 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. Balanced Payments

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

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

D. Balance of Payment Function

Conditions of entry and exit of 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 strive to move in a profitable direction.

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

  • As 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 situation related to international economic transactions of a
    country.
  • As international financial data.
  • As a data collection tool for 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 that will be issued in international transactions
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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 preparing the
balance of payments are as follows:

1. To find
out the state of the economy in 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 other
countries.
By knowing these conditions, the domestic government can determine policies or steps
that must be taken so that when carrying out economic transactions it benefits.

2. To find out the existing resources
in each country

The resources owned by a country vary. 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 wheels of the
domestic economy.

The resources owned by a country can be identified 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
economic transactions must be carried out.

4.
To find out the size of the foreign exchange budget required 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 in order to gain 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 foreign exchange budget.
One tool 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 experience
losses.

5. To
find out the steps that must be taken in the field of economic transactions

In order not to make the wrong move when carrying out economic transactions, the government of a country needs to
think about the right steps so that the country does not experience losses when carrying out economic
transactions.

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

6. To find out
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 are 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 relating 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 credit 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 Sheet

The balance of capital results 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 the salaries of foreign workers

5. Services balance

Services balance is a record in the balance sheet that records service transactions carried out by a country and
received by other countries during one 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 flow of funds from abroad, both funds going out and incoming funds.
The inflow and outflow 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 overseas.
Meanwhile, credit transactions are transactions
received from abroad.

So, that’s a brief explanation of the meaning, function, purpose, and components of the Balance of Payments which
can help Sinaumed’s know and become more familiar with what a Balance of Payments is and its importance to a
country.

Sinaumed’s can learn more about the Balance of Payments or material about the economy between countries
through the books available at sinaumedia, as #Friends Without Borders for Sinaumed’s, we will always provide a
selection of quality and useful books.
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