Balance Of Payment (BOP) & Balance of Trade (BOT)

Presented by Group 1

Aditya Kurundkar 061

Aishwarya Phalke 062

Pooja Ajitsaria 063

Akta Gangwal 064

Vinstin Alexander 065

Introduction

Balance of Payments (BOP) accounts are an

accounting record of all monetary transactions

between a country and the rest of the world. These

transactions include payments for the country's

exports and imports of goods & services, financial

capital, and financial transfers.

Introduction A country has to deal with other countries in respect of 3 items:- Visible items which include all types of physical

goods exported and imported. Invisible items which include all those services

whose export and import are not visible. e.g. transport services, medical services etc.

Capital transfers which are concerned with capital receipts and capital payment.

Features It is a systematic record of all economic transactions

between one country and the rest of the world. It includes all transactions, visible as well as

invisible. It relates to a period of time. Generally, it is an

annual statement. It adopts a double-entry book-keeping system. It has

two sides: credit side and debit side. Receipts are recorded on the credit side and payments on the debit side.

Components of BOP

The three major components of balance of payment are as follows:

1. Current Account2. Capital Account3. Balancing Item

Components of BOP

1. Current Account It refers to an account which records all the

transactions relating to export and import of goods and services and unilateral transfer

It contains the receipts and payments relating to all the transactions of visible items, invisible items and unilateral transfers

It shows the net income generated in the foreign sector

Components of BOP

Components of Current Account :

Export and Import of Goods (Merchandise

Transactions or Visible Trade)

Export and Import of Services (Invisible Trade)

Unilateral or Unrequited Transfers to and from

abroad (One sided Transactions)

Income receipts and payments to and from abroad

Components of BOP

2. Capital Account It records all those transactions, between the

residents of a country and the rest of the world, which cause a change in the assets or liabilities of the residents of the country or its government

It is related to claims and liabilities of financial nature

Capital Account is used to:

a. Finance deficit in current account; or

b. Absorb surplus of current account.

Components of BOP

Components of Capital Account:

Borrowings and landings to and from abroad

Investments to and from abroad

Change in Foreign Exchange Reserves

Components of BOP

3. Balancing Item It is simply an amount that accounts for any

statistical errors and assures that the current and capital accounts sum to zero

By the principles of double entry accounting, an entry in the current account gives rise to an entry in the capital account, and in aggregate the two accounts automatically balance

Components of BOP

It may be positive or negative

A balance isn't always reflected in reported

figures for the current and capital accounts, which

might, for example, report a surplus for both

accounts

Balance of Trade The difference between a country's imports and its

exports. Balance of trade is the largest component of a country's balance of payments

Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad

Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy

When exports are greater than imports than the BOT is favourable and if imports are greater than exports then it is unfavourable

BOP vs. BOT

BOP1. It is a broad term.2. It includes all transactions

related to visible, invisible and capital transfers.

3. It is always balances itself.

4. BOP = Current Account + Capital Account  + or - Balancing item ( Errors and omissions)

BOT1. It is a narrow term.2. It includes only visible

items.3. It can be favourable or

unfavourable.4. BOT = Net Earning on 

Export - Net payment for imports.

BOP vs. BOT

BOP5. Following are main factors which affect BOPa) Conditions of foreign lenders. b) Economic policy of Govt. c) all the factors of BOT

BOT5. Following are main factors which affect BOTa) cost of productionb) availability of raw materialsc) Exchange rated) Prices of goods manufactured at home

Limitation of Balance of Payments

1. Coverage of Transactions:

Government, Central banks

International Institutions

Illegal Transactions

2. Classifications of Items

3. Agreements and their Implementation

4. Valuation

Balance of Payments

Measures to correct disequilibrium

Measures to Correct Disequilibrium

Devaluation Increasing interest rates Export Promotion Reducing inflation Exchange control Make domestic companies competitive Take further loans from foreigners

Present Status A country, like India, which is on the path of

development generally, experiences a deficit balance of payments situation.

This is because such a country requires imported machines, technology and capital equipment's in order to successfully launch and carry out the programme of industrialization

The stress in India’s BoP, which was observed during 2011-12 as a fallout of the euro zone crisis and inelastic domestic demand for certain key imports

The rise in imports owed to India’s dependence on crude petroleum oil imports and elevated levels of gold imports.

Sr. No. Item 2009-10 2010-

2112011-12 2012-

132013-14

I Current Account

1.1 Exports 182.442 256.159 309.774 306.581

318.607

1.2 Imports 300.644 383.481 499.533 502.237

466.214

1.3 Trade Balance -118.202

-127.322

-189.759

-195.656

-147.609

1.4 Invisibles 80.022 79.269 111.604 107.493

115.212

Current A/C Bal

-38.18 -48.053

-78.155

-88.163

-32.397

II Capital Account

2.1 External Assistance

2.89 4.94 2.296 0.982 1.03

2.2 Ext. Borrowings 2.00 12.16 103.44 8.48 11.772.3 Short Term Debt 7.55 12.03 6.66 21.65 -5.042.4 Banking Capital 2.08 4.96 16.226 16.57 25.442.5 Foreign

Investment50.36 42.12 39.23 46.71 26.38

2.6 Other Flows -13.25 -12.48 -7.008 -5.105 -10.81Capital Account Bal

51.63 61.104 65.323 91.98 47.905

In Billion US $

Conclusion

To correct disequilibrium in the India’s Balance of Payment

India should become Export driven country from Import driven country

India should build foreign exchange reserves to safeguard unforeseen future.

Enhancement of capacity of Production

Flows of FDI’s to bring economic growth

Thank You !!!