BALANCE OF PAYMENT

DEFINITION

A Balance of Payment account is a statement of double entry system of record of all economic transactions (involving foreign payments) between residents of a country and the rest of the world carried out in specific period of time.

PURPOSE OF BALANCE OF PAYMENT

Provides data for economic analysis

Reveals changes in the composition & magnitude of foreign trade

Provides indications of future repercussions of country’s past trade performances

Reveals the weak and strong points of a country’s foreign trade relations

TERMINOLOGIES

Favorable Balance Of Payments – Value of total receipts more than total payments

Adverse Balance Of Payments – Value of total receipts less than total payments

Balanced Balance Of Payments – Value of total receipts equals total payments

Unrequited receipts – Receipts for which nothing has to be paid in return.

Unrequited payments – Payments for which nothing is received in return.

BALANCE OF TRADE

Definition: Difference between value of exports and imports of visible items only

BOT BOP

• Records only merchandise transactions• Does not record transactions of capital nature• A part of current account of BOP

•Records transactions relating to both goods and services• Records transaction of capital nature• Includes BOT , Balance of services , Balance Of Unrequited Transfers and Balance Of Capital Transactions.

BALANCE OF PAYMENT ACCOUNTS

CURRENTACCOUNT

Visible items

Invisible items

Unrequited transfers

CURRENT ACCOUNT

All transactions relating to goods, services and unrequited transfers constitute current account

Flow of items pertaining to specific period of time

Visible items include goods

Invisible items include services

CAPITAL ACCOUNT

All transactions indicating changes in stock magnitudes concerning capital receipts and payments constitute capital account

Relates to - Borrowing - Capital repayment - Sale of assets - Change in stock of gold - Change in reserve of foreign currency

DIFFERENCE BETWEEN CURRENT ACCOUNT AND

CAPITAL ACCOUNT

CURRENT ACCOUNT CAPITAL ACCOUNT

• Indicates flow aspect of country’s national transactions• Relates to goods , services and unrequited transfers

• Indicates changes in stock magnitudes• Relates to all transactions constituting debts and transfer of ownership

STRUCTURE OF BALANCE OF PAYMENTS ACCOUNT

CREDITS DEBITS

Current A/c:•Exports of goods(Visible items)•Exports of services (Invisibles)•Unrequited receipts(gifts , remittances, indemnities, etc. form foreigners)Capital A/c:•Capital receipts (Borrowings from abroad , capital repayments by , or sale of assets to foreigners, increase in stock of gold and reserves of foreign currency etc.)

Current A/c:•Imports of goods(Visible items)•Imports of services(Invisibles)•Unrequited payments( gifts, remittance, indemnities etc. to foreigners)Capital A/c:•Capital payments (lending to , capital repayments to , or purchase of assets from foreigners, reduction in stock of gold and reserves of foreign currency etc.)

Total Receipts Total Payments

AN EXAMPLE

Let us consider the following hypothetical situation:

Export of goods Rs. 550 Crore Import of goods Rs. 650 Crore Export of services Rs. 150 Crore Import of services Rs. 70 Crore Unrequited receipts Rs. 100 Crore Unrequited payments Rs. 80 Crore Capital receipts Rs. 200 Crore Capital payments Rs. 200 Crore.

BALANCE OF PAYMENT ACCOUNT

Credits

Current A/c:1)Export of goods 5502)Export of services 1503)Unrequited receipts 100

Capital A/c:1)Capital receipts 200

Total receipts 1000

Debits

Current A/c:1)Import of goods 6502)Import of services 703)Unrequited payments 80

Capital A/c:1)Capital payments 200

Total payments 1000State of Equality

DISEQUILIBRIUM

Total receipts and total payments inequality shows disequilibrium of balance of payments account

Total receipt and payment arising from autonomous transactions determine the deficit or surplus in the balance of payments

If payments>receipts, BOP shows Deficit

If payments<receipts, BOP shows Surplus

KINDS OF BOP DISEQUILIBRIUM

Fundamental Disequilibrium

Cyclical Disequilibrium

Structural Disequilibrium

CAUSES OF DISEQUILIBRIUM

Increase in imports

Slow progress in exports

Burden of interest payments

International developments

Deficit in capital account

CORRECTIVE MEASURES Devaluation Export promotion Import restrictions Import substitution Government intervention Supply of credit Special treatment to NRIs Announcement of trade policies Foreign aid Improvements in production efficiency

BOP ADJUSTMENTS

INDIRECT MEASURES Income measures

Fiscal Policy

Monetary Policy

Price measures

DIRECT MEASURE Exchange control