BALANCE OF PAYMENT

BY,
NELCY DOSHI
ROLL NO-023
 Balance of Payments
1. When countries trade money flows into and out of
each country
2. The accounts that record a nation’s international
financial transactions are called its balance of
payments (BP)
3. Records all financial transactions between a country
and the rest of the world over a year
4. The BP is maintained on a double-entry bookkeeping
system
 Balance of Payments
The difference between receipts and payments

BP Receipts
BP Payments
• costs of goods exported.
• money spent by foreign
• costs of goods imported.
tourists.
• spending by tourists abroad
• transportation.
• new overseas investments.
• payments of dividends and
interest from FDI abroad. • cost of foreign aid.
• new foreign investments
 IMBALANCES
•• While
WhilethetheBOP
BOPhashastotobalance
balanceoverall,
overall,surpluses
surplusesorordeficits
deficitson
on
its individual elements can lead to imbalances
its individual elements can lead to imbalances between between
countries.
countries.InIngeneral
generalthere
thereisisconcern
concernoveroverdeficits
deficitsininthe
the
current
currentaccount.
account.Countries
Countrieswith withdeficits
deficitsinintheir
theircurrent
current
accounts
accountswill
willbuild
buildup
upincreasing
increasingdebtdebtand/or
and/orsee seeincreased
increased
foreign
foreign ownership of their assets. The types of deficitsthat
ownership of their assets. The types of deficits that
typically
typicallyraise
raiseconcern
concernare are
•• AAvisible
visibletrade
tradedeficit
deficitwhere
whereaanation
nationisisimporting
importingmore more
physical
physicalgoods
goodsthan
thanititexports
exports(even
(evenififthis
thisisisbalanced
balancedby bythe
the
other
othercomponents
componentsofofthe thecurrent
currentaccount.)
account.)
•• An
Anoverall
overallcurrent
currentaccount
accountdeficit.
deficit.
•• AAbasic
basicdeficit
deficitwhich
whichisisthethecurrent
currentaccount
accountplus plusforeign
foreigndirect
direct
investment
investment(but(butexcluding
excludingother
otherelements
elementsofofthe thecapital
capital
account
accountlike
likeshort
shortterms
termsloans
loansandandthethereserve
reserveaccount.)
account.)
 CAUSES OF IMBALANCES
• Current account factors - these include the exchange rate, the
government's fiscal deficit, business competitiveness , and
private behavior such as the willingness of consumers to go
into debt to finance extra consumption.
• Capital account factors – where a global savings glut caused
by savers in surplus countries, runs ahead of the available
investment opportunities resulting in excess consumption and
asset price inflation .
 Balancing Mechanisms

•REBALANCING BY CHANGING
EXCHANGE RATE
•REBALANCING BY ADJUSTING
INTERNAL PRICES AND DEMAND
THANK YOU