Balance of Payments (Meaning and Components), Economic growth (Meaning and Sources)

BALANCE OF PAYMENTS (BOP)

An statement that records each and every economy transactions of one country with the rest of the world for a specified time period is known as balance of payment. It is abbreviated as BOP. The balance of payments (BOP) is also known as balance of international payments. It include each and every transactions between one country with the rest of the world concerning goods, services and income; financial claims on and liabilities to the non-residents country of the world; and transfers such as gifts. The balance of payments categorize these transactions in two accounts: (i) The current account and (ii) the capital account.

The current account comprises transactions (or dealings) in goods, services, current transfer and investment income. And the capital account generally comprises transactions (or dealing) in financial instruments.

Characteristics

• It is a organized record of each and every economic transactions between one country with rest of the world.
• It comprises all transactions in visible items (i.e. goods), invisible items (i.e. services) and flow of capital (i.e. assets) during a specified period of time.
• Generally, the balance of payment will be an annual statement.
• It adopts double-entry book keeping system. It has two sides: debit side and credit side.
• As the rule of accounting, in credit side receipts are recorded and on debit side payment are recorded.

Economic Growth

Economic growth is a narrower concept than economic development. Economic growth is an increase or rise in a country's or state's real level of national output which can be caused by an raise in the quality of resources, enhance in the quality of education & development in technology or in another way an raise in the value of goods and services produced by each every sector of the economy. Economic Growth can be measured by an increase in Gross Domestic product (GDP) of a country.

Sources of economic growth

Economic growth is the process of growing the economy's capacity to produce goods and services which can be achieved by escalating the quantity as well as quality of resources. The quantity option can comprise raising in the quantities of land, labor, capital or entrepreneurship. The quality option mainly includes developments in technology and human resource (capital).

The two primary methods of achieving economic growth are increasing or raising the quantity as well as quality of resources, that might be named the Q and Q of economic growth. Each method increases the production capabilities of the economy that can result in a greater amount of production that can then diminish the fundamental problem of scarcity. Economic growth is commonly demonstrated as either a rightward shift of the long-run aggregate supply curve or an outward shift of the production possibilities curve.

1. Resource Quantity: The initial or first most obvious method of attaining economic growth is to increase or raise the quantities of available resources. A direct inference of scarcity is that limited resources. This implies limited production of goods as well services. When those resources are easily available (or less limited), the production can be greater.

i. Labor: Simply, labor is the human effort or power. Labor is involved in almost every act of production, from mining to manufacturing. As such, if the economy has sufficient (or more) workers, then it can produce large volume of goods. The quantity of labor is typically expanded in three ways:

• The initial and recognized is natural population growth. Labor is the human (people). More births today implies increased number of labor in next 16-20 years. Generally, the birth rate surpasses the death rate, the size of the population increases. When the people reach their working age, the labor force also increases.
• Immigration from other different nations is the second way. Workers who move from one country or state to another instantly increase in the labor force of the destination country.
• The other way is an increase or raises in the labor force participation rate. This implies that larger promotion of the population engaged in works. The pool of labor increases when a larger proportion of the population is willing as well as able to work.

ii. Capital: The machinery, equipment and other capital goods in the factories that employees use to help their production efforts are serious to economic growth. Capital must be produced using available resources that could have been used to make something else such as need or want satisfying. This act of increasing capital that enables greater future production but which means giving up goods that would have provided current satisfaction, is commonly named as an investment.

iii. Natural Resources: In the economy, natural resources provide the raw materials that are converted into the commodity (i.e. goods). When the economy has sufficient (or more) raw materials, it can produce more goods. Natural resources are natural. They come within the planet. We cannot increase the volume of the natural resources. The key to raising the quantity of natural resources is not creating more so much as just finding them.

2. Resource Quality: The second technique of attaining economic growth is to increase the qualities of available resources (especially human quality). This will helps to improve the productivity of a given quantity of available resources.

• Education: Education enhances the quality of human resources (worker). Education is the best initial method of enhancing the quality of human resources. This also goes by the term human capital. Better educated manpower results more productivity of labor. Education can be of the formal (sitting in a classroom) variety that honor diplomas which forces students to increase their conceptual understanding. Education can also be of the informal (on the job training) variety that comes from learning by doing as well as experience. Both methods (i.e. formal and informal education) are valuable methods of enhancing human capital and the quality of human resources. Some knowledge is best acquired through formal education and some is best obtained by just doing it.
• Technology: Technology is the knowledge and information that society as a whole possesses about the production of goods and services. Improving technology makes it possible to produce more output with the same resources or to use fewer resources to produce the same output, that is, to improvetechnical efficiency. While technology concerns all aspects of production, it most often surfaces in the quality of capital. That is, the economy uses technological improvements to build better, technically more efficient.

Reference

Bernake and Abel, Macroeconomics, Singapore, Pearson Education latest edition