BALANCE OF PAYMENT
(BOP)
A country has to deal with other countries in
respect of the following
1. Visible items which include all types of physical goods exported
and imported.
2. Invisible items which include all those services whose export and
import are not visible. e.g. transport services, medical services etc.
3. Capital transfers which are concerned with capital receipts and
capital payment.
Balance of Payments
According to Kindle Berger, "The balance of payments of a
country is a systematic record of all economic transactions
between the residents of the reporting country and residents of
foreign countries during a given period of time".
It is a double entry system of record of all economic transactions
between the residents of the country and the rest of the world
carried out in a specific period of time
when we say “a country’s balance of payments” we are
referring to the transactions of its citizens and government.
Balance Of Payment : Definition
The balance of payments of a country is a systematic record of
all economic transactions between the residents of a country
and the rest of the world. It presents a classified record of all
receipts on account of goods exported, services rendered and
capital received by residents and payments made by them on
account of goods imported and services received from the
capital transferred to non-residents or foreigners.
- Reserve Bank of India
Features
o It is a systematic record of all economic transactions
between one country and the rest of the world.
oIt includes all transactions, visible as well as invisible.
o It relates to a period of time. Generally, it is an annual
statement.
o 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.
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
Balance of Trade V/s Balance of Payment
The Balance of Payment takes into account all the transaction with
the rest of the worlds
The Balance of Trade takes into account all the trade transaction with
the rest of the worlds
BOP v/s BOT
BOP BOT
1. It is a broad term. 1. It is a narrow term.
2. It includes all transactions related to 2. It includes only visible items.
visible, invisible and capital transfers.
3. It is always balances itself.
3. It can be favourable or unfavourable.
4. BOP = Current Account + Capital
Account + or - Balancing item 4. BOT = Net Earning on
(Errors and omissions) Export - Net payment for imports.
5. Following are main factors 5. Following are main factors
which affect BOP which affect BOT
a)Conditions of foreign lenders. a) cost of production
b) Economic policy of Govt. b) availability of raw materials
c) all the factors of BOT c) Exchange rate
d) Prices of goods manufactured at home
Importance of Balance Of Payments
1. BOP records all the transactions that create demand for and supply of a
currency.
2. Judge economic and financial status of a country in the short-term
3. BOP may confirm trend in economy’s international trade and exchange
rate of the currency. This may also indicate change or reversal in the
trend.
4. This may indicate policy shift of the monetary authority (RBI) of the
country.
The General Rule in BOP Accounting
a. If a transaction earns foreign currency for the nation, it is a
credit and is recorded as a plus item.
b. If a transaction involves spending of foreign currency it is
a debit and is recorded as a negative item.
The various components of a BOP statement
1. Current Account
2. Capital Account
3. Reserve Account
4. Errors & Omissions
Current Account Balance
• BOP on current account is a statement of actual receipts and payments in
short period.
• It includes the value of export and imports of both visible and invisible
goods. There can be either surplus or deficit in current account.
• The current account includes:- export & import of services, interests,
profits, dividends and unilateral receipts/payments from/to abroad.
• BOP on current account refers to the inclusion of three balances of
namely – Merchandise balance, Services balance and Unilateral Transfer
balance
Types of Balances
Trade Balance
Merchandise: exports - imports of goods
Services: exports - imports of services
Income Balance
Net investment income: net income receipts from assets
Net international compensation to employees: net compensation of
Employees
Net Unilateral Transfers
Gifts from foreign countries minus gifts to foreign countries
Capital Account Balance
▪ The capital account records all international transactions that involve a
resident of the country concerned changing either his assets with or his
liabilities to a resident of another country. Transactions in the capital
account reflect a change in a stock – either assets or liabilities.
▪ It is difference between the receipts and payments on account of capital
account. It refers to all financial transactions.
▪ The capital account involves inflows and outflows relating to investments,
short term borrowings/lending, and medium term to long term
borrowing/lending.
Capital Account Balance
▪ There can be surplus or deficit in capital account.
▪ It includes: - private foreign loan flow, movement in banking
capital, official capital transactions, reserves, gold movement
etc.
▪ These are classifies into two categories-
o Direct foreign investments
o Portfolio investments
o Other capital
The Reserve Account
Three accounts: IMF, SDR, & Reserve and Monetary
Gold are collectively called as The Reserve Account.
The IMF account contains purchases (credits) and re-
purchase (debits) from International Monetary Fund.
Special Drawing Rights (SDRs) are a reserve asset created
by IMF and allocated from time to time to member
countries. It can be used to settle international payments
between monetary authorities of two different countries.
Errors & Omissions
➢ The entries under this head relate mainly to leads and lags in
reporting of transactions
➢ It is of a balancing entry and is needed to offset the overstated or
understated components.
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