Balance Of
Payment
Introductio
n
Balance of payments (BOP) accounts are an
accounting record of all monetary transactions
between a country and the rest of the world. These
transactions include payments for the country's exports
and imports of goods & services, financial capital, and
financial transfers.
A country has to deal with other countries in respect of
3 items:-
Visible items which include all types of physical goods
exported and imported.
Invisible items which include all those services whose
export and import are not visible. e.g. transport
services, medical services etc.
Capital transfers which are concerned with capital
Definition
-
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".
Feature
s
It is a systematic record of all economic
transactions between one country and the rest
of the world.
It includes all transactions, visible as well as
invisible.
It relates to a period of time. Generally, it is an
annual statement.
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.
Components of
BOP
1. 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.
2. Capital Account Balance
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.
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.
Overall
3.
BOP -:
Total of a country’s current and capital account is
reflected in overall Balance of payments. It includes
errors and omissions and official reserve
transactions.
The errors may be due to statistical
discrepancies & omission may be due to certain
transactions may not be recorded.
For e.g.: A remittance by an Indian working abroad
to India may not yet recorded, or a payment of
dividend abroad by an MNC operating in India may
not yet recorded or so on.
The errors and omissions amount equals to the
amount necessary to balance both the sides
Causes of
Disequilibrium
1. Natural causes – e.g. floods, earthquake etc.
2. Economic causes – e.g. Cyclical
Fluctuations, Inflation, Demonstration
Effect etc.
3. Political causes – e.g. international
relation, political instability, etc.
4. Social factors – e.g. change in taste and
preferences etc.
Monetary measures
Devaluation - Devaluation refers to
deliberate attempt made by monetary
authorities to bring down the value of
home currency against foreign currency.
When devaluation is effected, the value
of home currency goes down against
foreign currency, Let us suppose the
exchange rate remains $1 = Rs. 10
before devaluation. Let us suppose,
devaluation takes place which reduces
the value of home currency and now
the exchange rate becomes $1
= Rs. 20.
2. Non-Monetary Measures –
Export Promotion –
The government can adopt export promotion
measures to correct disequilibrium in the balance
of payments. This includes substitutes, tax
concessions to exporters, marketing facilities,
credit and incentives to exporters, etc.
The government may also help to promote export
through exhibition, trade fairs; conducting
marketing research & by providing the required
administrative and diplomatic help to tap the
potential markets
Quotas –
Under the quota system, the
government may fix and permit the
maximum quantity or value of a
commodity to be imported during a
given period. By restricting imports
through the quota system, the deficit is
reduced and the balance of payments
position is improved.
Tariffs –
Tariffs are duties (taxes) imposed on
imports. When tariffs are imposed, the
Indian currency had been devalued thrice
In 1949, 1966, 1991
