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Is It Bad to Have a Big Balance of Payment with another Country?

In the most recent US elections, people were rechristened into international trade. The answer to most questions was simple- America is producing less and buying more from other countries. This leads to a negative balance of payments for us and makes us economy tumble and fall. However, is a balance of payment a completely bad event or do we have some positive takeaways from the same? Let’s learn in this post.

What is balance of payments?

The balance of payment is a number or sum that countries calculate at regular intervals to keep their monetary transactions in check. When a country pays money, it is counted as a debit whereas if a country gets paid money, it is counted as a credit. In theory, the debit should be equal to credit. However, in real life, it doesn’t happen that way.

To put it simply, lets understand that no country is completely self-sufficient and due to certain economic pressures, it could be vital to import some goods and services instead of producing them at home. The most important factor to consider here is cost. If importing is cheaper than producing, then any country will prefer to import. This leads to some countries specializing in certain goods and services.

When we buy and sell to different countries, we have to care for the value of transaction. Balance of Payment of BOP is calculated every quarter and every calendar year. This helps countries know the net transfer of monies between the countries. For example, Saudi Arabia is one of the most dominating oil economic so the world. When they export oil to other nations, they get paid money but if they are sending out enough money, the debit will be smaller than the credit and they will have a BOP surplus.

America has a huge BOP deficit with countries like China and Canada. These countries export huge amount of goods and services to the US which helps them in maintaining a positive BOP or surplus BOP with the US. On the other hand, the US has a deficit BOP with both China and Canada.

Is BOP deficit a bad thing?

A BOP deficit is not always a bad thing. Take this argument for example. America produces goods worth $100 in a year but doesn’t export anything. Instead, it imports electronic products from China worth $500. Clearly, the US economy is in a major deficit. However, it also means that the US citizens are able to consume $500 worth of goods over and above their own $100 value produced at home. In total, the US is a flourishing economy because its citizens consume goods worth $600 even when they produce goods worth $100 only.

BOP cannot be called bad in absolute terms. However, it should be the duty of every government to ensure that it doesn’t go beyond a certain tipping point. Too much import can harm an economy and make it completely dependent on other entities which could have severe economic and political consequences.