The other measures of identifying a deficit or surplus in the BOP statement are:
Deficit or Surplus in the Current Account and/or Trade Account.
The Basic Balance which shows the relative deficit or surplus in the BOP.
A DEFICIT IN THE BASIC BALANCE IS DESIRABLE OR UNDESIRABLE!
The basic balance was regarded as the best indicator of the economy’s position vis-à-vis other countries in the 1950’s and the 1960’s. It is defined as the sum of the BOP on current account and the net balance on long term capital, which were considered as the most stable elements in the balance of payments.
A worsening of the basic balance [an increase in a deficit or a reduction in a surplus or even a move from the surplus to deficit] is seen as an indication of deterioration in the [relative] state of the economy. Thus it is very much evident that a deficit in the basic balance is a clear indicator of worsening of the state of the country’s BOP position, and thus can be said to be undesirable at the very outset.
However, on further thoughts, a deficit in the basic balance can also be understood to be desirable. This can be explained as follows: A deficit on the basic balance could come about in various ways, which are not mutually equivalent. E.g. suppose that the basic balance is in deficit because a current account deficit is accompanied by a deficit on the long term capital account. This deficit in long term capital account could be clearly observed in a developing country’s which might be investing heavily on capital goods for advancement on the agricultural and industrial fields. This long term capital outflow will, in the future, generate profits, dividends and interest payments which will improve the current account and so, ceteris paribus, will reduce or perhaps reduce the deficit.
Thus a deficit in basic balance can be desirable as well as undesirable, as it clearly depends upon what is leading to a deficit in the long term capital account.
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