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to
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to
Balance
of
Payments
Welcome to
International Trade
International trade refers to trade
between the residents of two different
countries
International Trade
The exporter requires payment in the
currency of the exporters country
whereas the importer can pay only in
the currency of the importers country
A need, therefore, arises for conversion
of the currency of the importer's
country into that of the exporters
country
Foreign Exchange
Foreign exchange is the mechanism by
which the currency of one country
gets converted into the currency of
another country
The conversion of currencies is done
by banks who deal in foreign exchange
Foreign Exchange
The rate at which one currency is
converted into another currency is the
rate of exchange between the
currencies concerned
The banks operating at a financial
centre and dealing in foreign exchange
constitute the foreign exchange
market
Foreign Exchange as Stock
In another sense, the term foreign
exchange is used to refer to the very
balance held abroad
FEMA, 1999: foreign exchange
includes foreign currency, balances
kept abroad, instruments payable in
foreign currency and instruments
drawn abroad but payable in Indian
currency
Balance of Payments
Balance of payments ( BOP ) is the
systematic summary of the economic
transactions of the residents of a
country with the rest of the world
during a specified time period, normally
a year
Features of BoP Statement
Economic Transactions:
An economic transaction arises when
values are exchanged or moved
between nations
Theses may arise from:
a. movement of goods in the form of
exports and imports
b. rendering of services abroad and
using foreign services
Features of BoP Statement
Economic Transactions:
c. Gifts/grants from one country to
another
d. Investments made abroad or
received from abroad
e. Income on investments received
from abroad or remitted abroad
f. Increase/ decrease in the
international reserves of the country
Features of BoP Statement
Transactions between residents with
Non-residents.
A Flow Statement.
Periodicity.
BoP Statement
In compilation of balance of payments,
double entry principle of accounting is
used
Currency Inflows Credits
( earn foreign exchange)
Currency Outflows Debits
( expend foreign exchange)
BoP Statement
BOP statement is presented with three
major components:
i) Current Account
ii) Capital Account
iii) Official Reserve Account
BALANCE
BALANCEOF
OF
PAYMENTS
PAYMENTS
Current
Account
Official Reserve
Account
Capital
Account
Foreign
Direct
Investment (FDI)
Portfolio
Investment
Private
Short-term
Capital Flows
Decrease or
increase in
foreign
exchange
reserves
Goods account: Exports & Imports
Services account: Travel, transportation, Insurance etc.
Unilateral transfers: Gifts, donations & subsidies
Investment Income : Interest, Dividends etc.
BOP Accounting
1. Export of goods USD 200 Mn. realisation
deposited in bank abroad
2. Import of goods USD 150 Mn. payment
made from bank account abroad
3. Amount spent by foreign tourists in the
country USD 40 Mn.
4. Received goods as gift from another country
USD 60 Mn.
5. Export of commodities for USD 80 Mn. On a
government deal payment in gold by the
importing countrys government
Balance of Payments
(USD
Million)
Credit (+)
Debit
(-)
+170
A. CURRENT ACCOUNT
1. Merchandise
2. Trade
Trade
in Services
3. Unilateral
Transfers
Balance
280
210
+70
40
+40
60
+60
B. CAPITAL ACCOUNT
Bank balances abroad
C. OFFICIAL RESERVE ACCOUNT
150
240
-90
80
-80
Importance of BOP
a. Judge economic and financial status of
a country in the short-term
b. Deficit signifies a tendency to take stiff
measures for diminishing imports,
exchange control and restrictions on
repatriation of dividends/ interest
Importance of BOP
c. Consistent BOP deficit has an
unfavourable effect on exchange rate
depreciation of the currency
d. Central bank intervenes through its
regulatory stock to control volatility of
exchange rate
Link between the National Economy &
International Activities
National Income = Consumption +
Savings
National Spending = Consumption +
Investment
So,
National Income National Spending =
Savings Investment
If a nations income exceeds its spending,
savings will exceed domestic investment
Link between the National Economy &
International Activities
A nation that produces more than
it spends will save more than it
invests domestically and will have
a net capital outflow
This capital flow will appear as a
combination of capital account
deficit and an increase in official
reserves
Indias Overall Balance of Payments
(` crore)
Item
A.
2010-11 P
Credit
Debit
Net
Credit
Debit
Net
10
11
12
CURRENT ACCOUNT
I. MERCHANDISE
8,62,333
14,23,079
-5,60,746
11,39,517
17,34,545
-5,95,028
II. INVISIBLES (a+b+c)
7,74,512
3,94,392
3,80,120
8,99,484
5,06,990
3,92,494
16,36,845
18,17,471
-1,80,626
20,39,002
22,41,534
-2,02,532
1. Foreign Investment (a+b)
9,43,447
6,99,806
2,43,641
13,04,426
11,32,272
1,72,154
2. Loans (a+b+c)
3,49,720
2,88,047
61,673
4,86,050
3,59,057
1,26,993
3. Banking Capital (a+b)
2,92,105
2,82,261
9,844
4,19,277
3,97,252
22,025
452
-452
313
-313
54,300
1,16,874
-62,574
45,781
93,507
-47,726
16,39,572
13,87,440
2,52,132
22,55,534
19,82,401
2,73,133
7,269
-7,269
11,152
-11,152
32,76,417
32,12,180
64,237
42,94,536
42,35,087
59,449
Total Current Account (I+II)
B.
2009-10 PR
CAPITAL ACCOUNT
4. Rupee Debt Service
5. Other Capital
Total Capital Account (1to5)
C.
Errors & Omissions
D.
Overall Balance (A+B+C))
Source: Reserve Bank of India
Balance of Trade
The balance of trade is the difference
between the monetary value of exports and
imports of output in an economy over a
certain period
It is the relationship between a nation's
imports and exports
A positive balance is known as a trade
surplus and a negative balance is referred
to as a trade deficit or, informally, a trade
gap
Indias
International Trade
Indias
International Trade
Indias
International Trade
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