A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa. Balance of payments may be used as an indicator of economic and political stability.
The factors responsible for adverse balance of payments
1. Low export: due to low demand elasticity for exports and decline of the supply of
goods for export.
2. Increase in demands for imports: due to low production of essential goods in the domestic economy.
3. Unfavorable terms of trade: due to the fall in price of exports and the rise of price of exports which leads to low amount of receipts from abroad and the high
amount of payments abroad.
4. Shortage of capital goods: the capital goods then have to be imported at
whatever price.
5. Devaluation policy: which happens when the country's
export have low price
elasticity and when the imports have inelastic demand or when other countries
which export similar products also devalue their currencies.
6. Unfavorable climatic condition: This leads to fall in the country’s production, which leads to low export.