A country’s Balance of Payments reveals various aspects of a country’s international economic position. It presents the international financial position of the country.
It helps the government in taking decisions on monetary and fiscal policies on the one hand, and on external trade and payments issues on the other.
In the case of a developing country, the balance of payments shows the extent of dependence of the country’s economic development on the financial assistance by the developed countries.
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The greatest importance of balance of payments lies in its serving as an indicator of changing international economic position of a country. The balance of payments is the economic barometer which can be used to appraise a nation’s short-term international economic prospects, to evaluate the degree of its international solvency, and to determine the appropriateness of the exchange rate of country’s currency.
However, a country’s favorable balance of payments cannot be taken as an indicator of economic prosperity nor the adverse and even the unfavorable balance of payments is not a reflection of bankruptcy.
A balance of payments deficit per se is not the proof of competitive weakness of a nation in foreign markets. However, the longer the balance of payments deficit continues, the more it would imply some fundamental problems in that economy.
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Similarly, a favorable balance of payments should not always make a country complacent. A poor country may have a favorable balance of payments due to large inflow of foreign loans and equity capital. A developed country may have adverse balance of payments due to massive assistance given to developing countries.
Thus, a deficit or surplus of balance of payments of a country per se should not be taken as an index of economic bankruptcy or prosperity of the country. The balance of payments deals only with the transactions of the period under review.
It does not provide data about assets and liabilities that relate one country to others. However, despite all these short comings, the significance of balance of payments lies in the fact that it provides vital information to understand a country’s economic dealings with other countries.