Balance of Payments Presented by Mamta Kataria

Contents MeaningMeaning ObjectiveObjective CharacteristicsCharacteristics StructureStructure ComponentsComponents Balance of payments ‘Surplus’ and ‘Deficit’Balance of payments ‘Surplus’ and ‘Deficit’ Ways of Measuring of Deficit and SurplusWays of Measuring of Deficit and Surplus Meaning of disequilibrium in balance of paymentsMeaning of disequilibrium in balance of payments Causes of disequilibrium in balance of paymentsCauses of disequilibrium in balance of payments Measures to correct disequilibrium in Balance of PaymentsMeasures 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.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 statement having two sides. It is a record of economic transaction.It is a record of economic transaction. It shows a relation between receipts & payments.It shows a relation between receipts & payments. Visible & Invisible items both are included in this statement.Visible & Invisible items both are included in this statement. It is prepared for a certain period of time.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 book- keeping.The balance of payments account of a country is based on the principle of double-entry book- keeping. 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 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

Continue…. 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: 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. 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 AccountCurrent Account Capital AccountCapital Account Official AccountOfficial Account Current Account- The current account of a country consists of all transactions related to trade in goods and services and unilateral transfers.Current Account- The current account of a country consists of all transactions related to trade in goods and services and unilateral transfers.

Continue 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.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.

Continue…. 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.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 nation’s liquid and non liquid liabilities to foreign official holders and the change in nation’s official reserve assets. It measures the change in nation’s liquid and non liquid liabilities to foreign official holders and the change in nation’s official reserve assets.

Table. Balance of Payments account Credits(+) (Receipts) Debits(-)Payments Current Account Current Account Exports Imports (a)Goods Goods (b)Services Services (c) Transfer payments Transfer payments Capital Account Capital Account Borrowing from Lending to Foreign Countries Foreign countries Direct Investments By Foreign countries Direct Investments in Foreign countries countries Official Settlements Account Official Settlements Account Increase in Foreign Official Holdings Increase in Official Reserve of Gold and Foreign Currencies of Gold and Foreign Currencies Errors and Omissions Errors and Omissions

Major items of India’s Balance of Payments (US$ Million) (PR) (P) April-Dec( )(PR) April-Dec( )(P) Export Import Trade Balance Invisible,net Current Account Balance Capital Account* Change in Reserve Source: Reserve Bank of India Report

For example… Trade balance 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 balanceBasic balance Net liquidity balanceNet liquidity balance Official settlement balance.Official settlement balance.

Continue…. Basic balance- which includes the current account balance and long-term capital account balanceBasic 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.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.Official settlement account-It includes total net liquid balance and short term liquid balance.

Meaning of disequilibrium in balance of payments A country’s balance of payments is in disequilibrium when there is no perfect equality between the demand and supply for foreign exchange.A country’s 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 causesTemporary causes National IncomeNational Income InflationInflation Economic DevelopmentEconomic Development Borrowing and LendingBorrowing and Lending Change in exchange rateChange in exchange rate Political factors-like instable govt.Political factors-like instable govt.

Continue… Temporary Causes- Temporary causes may arises due to variations in the trade, effect of weather on agriculture production etc.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 country’s 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.National Income - Another cause is the change in country’s 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.

Continue…. 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.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.

Continue…. Economic Development- A country’s 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.Economic Development- A country’s 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.

Continue… 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.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.

Continue…. 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.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.

Continue… Political factors like instable govt.Political factors like instable govt. Lack of export substitutionLack of export substitution More importsMore imports

Measures of disequilibrium in balance of payments Full convertibility of rupeeFull convertibility of rupee Export promotionExport promotion Import substitutionImport substitution Export oriented unitsExport oriented units Special economic zonesSpecial economic zones Devaluation of CurrencyDevaluation of Currency Improvement in advance licensingImprovement in advance licensing

Continue Foreign loansForeign loans Encouragement to foreign investmentEncouragement to foreign investment Incentives to tourismIncentives to tourism