Balance of Payments
Presented by Mamta Kataria
Contents
Meaning Objective Characteristics Structure Components Balance of payments Surplus and Deficit Ways of Measuring of Deficit and Surplus Meaning of disequilibrium in balance of payments Causes of disequilibrium in balance of payments Measures to correct disequilibrium in Balance of Payments
Balance of Payments
A record of international transactions between residents of one country and the rest of the world
Objective
Its main objective is to represent the economic position of a country, whether its currency is rising or falling in its external value.
Characterstics of Balance of Payments
It is statement having two sides. It is a record of economic transaction. It shows a relation between receipts & payments. Visible & Invisible items both are included in this statement. It is prepared for a certain period of time.
Structure of balance of payments accounts
The balance of payments account of a country is based on the principle of double-entry bookkeeping. Each transaction is entered on the credit and debit side of statement. But balance of payments accounting differ from business accounting in one respect. In business accounting, debit(-) are shown on the left side
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and credits (+) on the right side of statement . But in the balance of payments accounting, debits are shown on the right side and credits on the left side of the statement. For example: When a payment is received from a foreign country, it is a credit transaction while payment to a foreign country is a debit transaction.
Components of Balance of payments
Current Account Capital Account Official Account Current Account- The current account of a country consists of all transactions related to trade in goods and services and unilateral transfers.
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Capital Account- The capital account of a country consist of its transaction in financial assets in the form of short-term and long-term lending and borrowing.
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Official Settlement Account In fact it is a part of capital account. But in UK and USA balance of payments accounts shows as a separate account. It measures the change in nations liquid and non liquid liabilities to foreign official holders and the change in nations official reserve assets.
Table. Balance of Payments account
Credits(+) (Receipts) Current Account Exports (a) Goods (b) Services (c) Transfer payments Capital Account Borrowing from Foreign countries Direct Investments By Foreign countries Lending to Foreign Countries Imports Goods Services Transfer payments Debits(-)Payments
Direct Investments in Foreign countries
Official Settlements Account Increase in Foreign Official Holdings Increase in Official Reserve of Gold and Foreign Currencies Errors and Omissions
Major items of Indias Balance of Payments (US$ Million)
2007-08(PR) 2008-09(P) April-Dec(200809)(PR) 150520 248967 -98446 70931 -27516 April-Dec(20092010)(P) 124473 213988 -89515 59185 -30330 Export Import Trade Balance Invisible,net Current Account Balance Capital Account* Change in Reserve 166163 257789 -91626 74592 -17034 175184 294587 -119403 89587 -29817
109198 -92164
9737 20080
7136 20380
41630 -11330
Source: Reserve Bank of India Report
Trade balance
For example
Debit: Sun Microsystems buys LCDs from Hong Kong. Credit: Singapore Airlines buys Boeing jet. Trade in services Debit: American rents an apartment in Singapore. Credit: TUI - Germany places an ad in the NYT.
Income payments
Debit: Honda US pays dividend to Honda Japan. Credit: Bank Austria pays salary to rep in NY office.
Unilateral Current Transactions
Debit: Peace Corps pays US volunteer teachers in Bosnia. Credit: TotalFina pays tuition of employee for Stern MBA.
BOP Surplus and Deficit
What is BOP Surplus ? What is BOP Deficit ?
Ways Of Measuring of Deficit or Surplus
Basic balance Net liquidity balance Official settlement balance.
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Basic balance- which includes the current account balance and long-term capital account balance Net-liquidity balance- which includes basic balance and short-term non liquid balance, allocation of SDRs. Official settlement account-It includes total net liquid balance and short term liquid balance.
Meaning of disequilibrium in balance of payments
A countrys balance of payments is in disequilibrium when there is no perfect equality between the demand and supply for foreign exchange.
Causes of disequilibrium in balance of payments
Temporary causes National Income Inflation Economic Development Borrowing and Lending Change in exchange rate Political factors-like instable govt.
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Temporary Causes- Temporary causes may arises due to variations in the trade, effect of weather on agriculture production etc. National Income - Another cause is the change in countrys national income. If the national income of a country increases, it will lead to an increase in imports thereby creating a deficit in balance of payments.
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Inflation- Inflation is another cause of disequilibrium in the balance of payment. If there is inflation in the country prices of exports increase, thus increase in export prices leading to decline in exports and rise in imports result in adverse.
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Economic Development- A countrys balance of payments also depends on its stage of economic development. If a country is developing it will have a deficit in its balance of payments.
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Borrowing and lending- A country which gives loans and grants on a large scale to other countries has a deficit in its balance of payments on capital account. On the other hand, a developing country borrowing large funds from other countries may have a favourable balance of payments.
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Change in exchange rate This change arise due to change in exports and imports. If exports of the country are more then imports the demand for its currency increase so that the rate of exchange moves in favours. On the other hand if imports are more than exports the demand for the foreign currency increase and the rate of exchange will against the country.
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Political factors like instable govt. Lack of export substitution More imports
Measures of disequilibrium in balance of payments
Full convertibility of rupee Export promotion Import substitution Export oriented units Special economic zones Devaluation of Currency Improvement in advance licensing
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Foreign loans Encouragement to foreign investment Incentives to tourism
