Balance of Payment

Introduction :-
Meaning :-
a balance of payment is a
double entry system of record of all economic
transaction between the resident of a country
and the rest of the world carried out is a
specific period of time.
The balance of payment statement shows the
followings :-
1. All receipts on accounts of goods exported.
2. Services rendered (to give)
3. Capital received by residents.
4. Payments made by the residents due to goods
imported and services received from.
5. Capital transferred to non- residents / foreigners.
 Components of Balance of Payments
a. Current Account
b. Capital Account
c. Unilateral payment account
d. Official settlement account
 Components of Balance of Payments
a. Current Account :-
it includes visible exports and invisible terms
like receipts and payment for various services like
banking , transportation, tourism, travels and like.
• Related Terms :
1. Visible Exports or Merchandise exports :-
its include the sale of good foreign countries.
2. Visible Import or Merchandise imports :-
it’s include the purchase of goods from
foreign countries.
 Components of Balance of Payments
3. Invisibles Exports:-
It’s include sale of services to the
foreign like insurance, tourism, transportation,
banking, financial services, salaries interest &
dividends received from foreign countries etc.
4. Invisibles Imports :-
It’s include the purchase of services from
the foreigners like insurance, tourism,
transportation, banking, financial services,
salaries interest & dividends received from
foreign countries etc.
 Components of Balance of Payments
NOTE :-
The IMF manual classifieds invisible account into as many as 121
items, while the India authorities classified into eight heads.

They are –
1) Travel
2) Transportation
3) Insurance
4) Investment Income
5) Govt. not included elsewhere
6) Miscellaneous (receipts/payments for the patents & royalties)
7) Transfer payment official
8) Transfer payment private
 Balance of Payments :- items under Current Account

Credits Debits

Merchandise exports (sale of goods) 1. Merchandise imports (purchase of goods)

Invisible Exports (sale of services) 2. Invisible imports (purchase of services)
(a). Transport services sold abroad (a). Transport services purchased
(b). Insurance services sold abroad from abroad
(c). Foreign tourists expenditure (b). Insurance services purchased
in the country from abroad
(d). Other services sold abroad (c). Tourists expenditure abroad
(e). Income received on loans (d). Other services purchased from abroad
and investments abroad (e). Income paid on loans and investments
in the home country
 Components of Balance of Payments
b. Capital Account :-
Capital A/c reads all public & private investment &
lending activities.
It is divided into three part :-
i). Direct Foreign investment :-
It represents the investment in fixed in foreign
countries.
Example – a firm’s acquisition of a foreign company,
– It’s creation of new manufacturing facility in a foreign
country.
– It’s expression of an exiting plant in a foreign country.
 Components of Balance of Payments
ii). Portfolio Investment: -
It’s represents transactions involving long
term financial assets, between countries that do
not affect the transfer of central.
Example – Stocks & Bonds,
iii). Capital Investment: -
It’s represents transactions involving
short-terms financial assets between countries.
Example - money market securities
 Components of Balance of Payments
C. Unilateral Account :-
Unilateral transfers are “ Giving the gifts”.
These includes –
grants, reparations (repair), private
remittances , disaster relief, etc.
For Example –
In 1998 – India give grant to Uganda. This item
would be on the Debit side of India’s B.O.P. &
Credit side of the Uganda’s B.O.P.
 Components of Balance of Payments
d. Official Settlements Account :-
It’s represents the official sales of
foreign currencies & other reserves to foreign
countries or official purchase of foreign
countries or other reserves from foreign
countries.
 B.O.P. items under Capital Account and Unilateral Transfers A/c & Official Settlements A/c

Capital Account credits Capital account Debits

Foreign long term investments in the 1. Long - term investments abroad

home country (less redemption and repayment) (less redemption and repayment)
(a). Direct investment in the home country (a). Direct investment abroad
(b). Foreign investment in domestic securities (b). Investment in foreign securities
(c). Other investment of foreigners in the home country (c). Other investments abroad
(d). Foreign Governments’ loans to the home country. (d). Governments loans to foreign countries.

Foreign short – term investment in the home country 2. Short – term investments abroad.

Unilateral Transfers Accounts Unilateral Transfers Accounts

(a). Private remittance received from abroad. (a). Private remittance abroad.
(b). Pension payments received from abroad. (b). Pension payments abroad.
(c). Government grants received from abroad (c). Government grants abroad

Official Settlements Accounts Official Settlements Accounts

). Official sales of foreign currencies or other (a). Official purchases of foreign currencies or other
reserve assets abroad. service assets.
 Disequilibrium in the BOP

Disequilibrium in the BOP :-

• Equilibrium:-
When the demand of a foreign currency and
supply of foreign currency of a country are equal, it is
viewed that the BOP of that country is in equilibrium
position.
• Disequilibrium:-
When supply is foreign currency is more than
demand of the foreign currency is known as
disequilibrium in BOP.
 Causes of Disequilibrium

The causes of disequilibrium in the BOP are ------

1)Economics factors
2)Political factors
3)Sociological factors
1). Economics Factors :-

Economics Factors consists of –

I. Development Disequilibrium
II.Cyclical Disequilibrium
III.Structural Disequilibrium
I. Development Disequilibrium :-
Development countries takes up develop activities like establishment
of Industries , construction of roads, bridge, power plant & other
infrastructural facilities like hospitals, educational institution etc.
These activities –
• Primarily increase import of capital goods, machinery & equipment.
• Secondary the expenditure is developmental activities result is
increase in income of people, demand, prices & increase of consumer
goods.

Thus development expenditure result in increase of capital goods &

consumer goods imports . this in turn, leads to deficit in the balance of
payments.
II. Cyclical Disequilibrium :-
The boom in the business activity in one country
increase consumption, aggregate demand and prices
more them the production.
Therefore the country import the goods to meet the
increased demand. And also, later it increase the
import of goods in order to establish new or expand
the existing production activities,
thus the boom condition increases import and this
resulted the disequilibrium in the B.O.P.
III. Structural Disequilibrium:-
Structural change in the economy,
include shift from agricultural sector to service sector,
developments of alternative source of supply,
development of effective substitutes,
exhaustion (use until completion)of the productive resources,
changes in transports channels & casts, etc.
These structural changes enhance the import of capital goods &
consumer goods of the changed direction/ Structure,
thus the resulting in disequilibrium in BOP.
2). Political Factors :-
Political factors like political uncertainties,
instability, internal disturbances & external was create
threatening site ration for industry & investment.
Hence, these factors contribute for the outflow of capital,
decline in domestic production & import of goods.
These factors result in disequilibrium in BOP.
For Example :- Pakistan, Sri lanka, etc.
3). Social factors :-
Drop-out existing culture ,
changes in taste,
fashion and
performance of the people contribute to the increase
in imports and deficit in the BOP.
Methods of correction of
Disequilibrium
They are :-
1. Automatic correction
2. Deliberate correction
1. Automatic Correction –
The deficit BOP indicates that the demand is
higher than supply these demand & supply factor result in
devaluation of the domestic currency in terms of foreign
currency .
The increased exchange rates makes the imports costlier and
export cheaper there for the country reduces imports
increasing exports, which is turn increases foreign exchange
reserves & restores equilibrium position.
2. Deliberate Measures:-
Govt .takes certain measures deliberately to control deficit
BOP position. Such measures are called deliberate measures.

They are:
A.Monetary Measures
B.Trade Measures
C.Miscellanies Measures
A. Monetary Measures:-
Monetary measures includes :-
a) Reduction in money supply
b) Devaluation
c) Exchange control
a). Reduction in money supply:-
Monetary measures aim at reducing imports through
reducing imparts Through reducing money supply. For this central banks
use sing credit central techniques-
These are- Control over-
Bank rates, open market operations SLR, CRR, etc, these techniques aim to
central of the money supply.
These measures enable the central bank of the country to reduce the supply
of money. Reduction in the supply of money lads to decline in income,
purchasing power, aggregate demand & consumption.
This decreased aggregate demand leads to increased the exports this
process of decline in imports & increase in exports corrects the deficit
in the BOP of a country.
b). Devaluation:-

Under, this measure, the country deliberately devalues its currency in order
to reduce imports and boost exports.
India devalued its rupee a number of times for this purpose. The imports
become costly, once the currency is devalued as the importer has to pay
more domestic currency for the same quantity of imports.
Through this measure, the Government of the domestic country reduces the
imports.
Further, the foreign businessmen feel that importing from this country is
cheap as they can get more number of products for the same amount of
their currency. Thus, this measure increases exports.
For example:-
1 US $=Rs. 35 in January 1997.
Indian Government devalued the rupee and the value of 1 US $=Rs.
45(approximately) in September 2000.
Imports from USA are costly now as we have to pay Rs. 45 rather than Rs. 35
for the imports worth one US$.
Similarly, exports to USA now are advantageous to us we get Rs. 45 for the
exports worth one US $ rather than Rs. 35. This measure helps Indian
Government to boost exports and reduce imports and thereby reduce
the deficit of the balance of payments.
c). Exchange Control:-
The exports after earning the foreign exchange have to
surrender it to the reserve Bank of India.
Importers get the permission from the reserve Bank of India for
imports and to use foreign exchange.
Reserve Bank of India and Government control imports in this
process and reduces the deficit of the balance of payments.
B. Trade Measures: -
Trade measures are divided into-
a) export promotional measures and
b) import control measures.
a). Export Promotional Measures :-
Export promotional measure include:
reduce export duties,
export subsidies,
encouragement to export oriented units (EOUs),
Creation of Export Processing Zones (EPZs),
Free Trade Zones (FTZs),
Easy loans for export oriented units,
marketing incentives and facilities etc.
b). Import Control Measures:-
Import control measures include –
import duties,
import quotas,
import licenses,
prohibiting import of certain items,
increase in customs duty on imports etc,
C. Miscellaneous Measures:-
Miscellaneous measures include –
loans in foreign currencies,
attracting foreign investment,
attracting NRI deposits,
development of tourism etc.
These measures help in reducing imports
and enhancing exports, thus contributes for the reduction of
the deficit in the balance of payments.
 Correction of balance of Payment Disequilibrium

Automatic Correction Deliberate Measures

Monetary Measures Trade Measures Miscellaneous Measures

1. Monetary contraction/ expansion 1. Loans in foreign currencies

2. Devaluation / Revaluation 2. Attracting foreign investment
3. Exchange control 3. Tourism development
4. Attracting NRI deposit

Export Promotion Import control

1.Reduction of export duties 1.Import duties
2.Export subsidies 2.Import quota
3.incentives 3.Import prohibition
 Important questions of BOP
1. Explain the concept of the Balance of
payment. How does it develop the
international trade situation?
2. Define the causes of disequilibrium in BOP
and explain the measures for ratification of
disequilibrium .
3. What do mean by BOP? Explain the accounts
of BPO in details?
 Important questions of BOP of
Export management
1. Explain the concept of export management
in detail.
2. How does export management company
operate domestic and foreign business
environment?
3. Write a short note on Export management.