Balance of Payments
Presenters: Khushmat Jain
Amey Joshi
Chetan Pawar
Rakesh Gangurde
Ujjwal Mestry
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
Importance of BOP
The BOP of the country help us to understand
that how we are financing our imports
BOP also helps us to understand the direction of
our exports as well as imports
It also helps us the monetary authority of the
country to formulate macro economics policy
e.g.:- monetary policy, fiscal policy, exim policy
It also help us to compare our performance with
that of other countries
Characterstics of BOP
BOP is always balanced
It is only an estimate because there are always
errors & omissions & sources from each relevant
data collected always vary
It is prepared for 1 financial year
It is a systematic record ( Double entry book
keeping accounting principles are followed
Balance of Trade
Definition: Difference between value of exports and
imports of visible items only
BOT BOP
• Records only merchandise •Records transactions relating to both
transactions goods and services
• Does not record transactions of • Records transaction of capital nature
capital nature
• Includes BOT , Balance of services ,
• A part of current account of BOP Balance Of Unrequited Transfers and
Balance Of Capital Transactions.
BALANCE OF PAYMENT ACCOUNTS
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 • Indicates changes in stock
country’s national magnitudes
transactions
• Relates to goods , services • Relates to all transactions
and unrequited transfers constituting debts and
transfer of ownership
STRUCTURE OF BALANCE OF
PAYMENTS ACCOUNT
CREDITS DEBITS
Current A/c: Current A/c:
•Exports of goods(Visible items) •Imports of goods(Visible items)
•Exports of services (Invisibles) •Imports of services(Invisibles)
•Unrequited receipts(gifts , remittances, •Unrequited payments( gifts, remittance,
indemnities, indemnities etc. to foreigners)
etc. form foreigners) Capital A/c:
Capital A/c: •Capital payments (lending to , capital
•Capital receipts (Borrowings from repayments to , or purchase of assets
abroad , capital repayments by , or sale from foreigners, reduction in stock of
of assets to foreigners, increase in stock gold and reserves of foreign currency
of gold and reserves of foreign currency etc.)
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 Debits
Current A/c: Current A/c:
1)Export of goods 550 1)Import of goods 650
2)Export of services 150 2)Import of services 70
3)Unrequited receipts 100 3)Unrequited payments 80
Capital A/c: Capital A/c:
1)Capital receipts 200 1)Capital payments 200
Total receipts 1000 Total payments 1000
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
NET ERRORS AND OMISSIONS
This is the last component of the balance of
payments and principally exists to correct any
possible errors made in accounting for the three
other accounts
They are often referred to as "balancing items".
Official international reserves
The official international reserve account
records the change in stock of official
international reserve assets (also known as
foreign exchange reserves) at the country's
monetary authority .
Official reserves assets include gold reserves,
foreign currencies, SDRs, reserve positions in
the IMF.
{Special Drawing Rights (SDRs) are potential
claims on the freely usable currencies of IMF
members.}
BASIC BALANCE
It is the sum of current account and capital
account, when credit in current and capital
account together are equal to debits in current
and capital accounts, then the basic balance is
achieved
Basic Balance= Current A/c + Capital A/c
OVERALL BALANCE
It is the sum of current account, capital account
and errors and emissions
Overall balance = basic balance + errors &
emissions
“BOP always balance”
Yes
No
Thanks you!
