1. Balance of Payments Dr. Raj Agrawal

2. Part I Balance of Payments Accounting

3. What kind of records should be kept? What do you want to find out? The nature of the record changes by what we are trying to find out. Balance of Payments Accounting

4. What kind of things do governments wish to know? What is the international demand for our currency doing to its value? Do we have enough currency reserves, or capacity to pay for our trade? Does our trade promote full employment? And so on. Balance of Payments Accounting

5. What kinds of transactions represent the basic focus of balance of payments accounting? What kinds of transactions represent the basic focus of balance of payments accounting? All transactions between the citizens of a nation and those of other nations are recorded in the balance of payments for a given period of time. All transactions between the citizens of a nation and those of other nations are recorded in the balance of payments for a given period of time.

6. Recording International Payments How is information recorded in balance of payments accounting? How is information recorded in balance of payments accounting? The basic technique is standard, double-entry accounting, The basic technique is standard, double-entry accounting, a flow of funds statement that shows changes in assets, liabilities and net worth over time. a flow of funds statement that shows changes in assets, liabilities and net worth over time.

7. Recording International Payments The balance of payments statement is to inform government authorities of the international position of the country to assist them with monetary-fiscal questions as well as trade and payments policies. The balance of payments statement is to inform government authorities of the international position of the country to assist them with monetary-fiscal questions as well as trade and payments policies.

8. Sources and Uses of Funds How does a country derive foreign currencies it needs to conduct its international business? How does a country derive foreign currencies it needs to conduct its international business? The sources of funds, the supply of foreign exchange, are The sources of funds, the supply of foreign exchange, are exports, exports, investment income, investment income,

9. Sources and Uses of Funds The sources of funds, the supply of foreign exchange, are The sources of funds, the supply of foreign exchange, are transfer payments received, transfer payments received, and long-term and short-term borrowing. and long-term and short-term borrowing.

10. Part II The Balance of Payments Accounts

11. BALANCE OF PAYMENTS ACCOUNTS These accounts are to summarize payments a country receives from other nations and payments it must make to other nations. They consist of the following five categories: 1. MERCHANDISE OR TRADE BALANCE: (Exports minus imports )

12. BALANCE OF PAYMENTS ACCOUNTS 2. GOODS AND SERVICES BALANCE: (Just add services) 3. NET UNILATERAL TRANSFERS (Gifts)  Indian government transfers to foreigners  (E.g., Foreign aid or wheat from Indian stockpiles)  Private remittances of wages earned abroad, and  Lots of other transfers.

13. BALANCE OF PAYMENTS ACCOUNTS To here, we are looking at the CURRENT ACCOUNT BALANCE (Net flows of goods, services and gifts). Again: 1. MERCHANDISE OR TRADE BALANCE: 2. GOODS AND SERVICES* BALANCE: 3. NET UNILATERAL TRANSFERS

14. Balance of Payments There is also a set of asset flows referred to as the CAPITAL ACCOUNT BALANCE 4. NET CHANGES IN FOREIGN HOLDINGS OF Indian ASSETS Flows of financial assets and similar claims, or Foreign direct and other investments in India., or “Private capital flows.” (Note that we are talking direct and portfolio investments here).

15. Balance of Payments 5. NET OFFICIAL INTERNATIONAL RESERVE TRANSACTION Foreign official holdings of Indian assets, Foreign official holdings of Indian assets, Indian holdings of official reserve (gold and foreign exchange) assets Indian holdings of official reserve (gold and foreign exchange) assets or, “Official asset flows.”

16. All Together Now 1. MERCHANDISE OR TRADE BALANCE: 2. GOODS AND SERVICES* BALANCE: 3. NET UNILATERAL TRANSFERS 4. 4. NET CHANGES IN FOREIGN HOLDINGS OF INDIAN ASSETS 5. NET OFFICIAL INTERNATIONAL RESERVE TRANSACTION

17. Balance of Payments THE BALANCE OF PAYMENTS IS, THEREFORE, THE SUM OF THE CURRENT AND CAPITAL ACCOUNT BALANCES. THE BALANCE OF PAYMENTS IS, THEREFORE, THE SUM OF THE CURRENT AND CAPITAL ACCOUNT BALANCES.

18. Services in the Balance of Payments Note: *Services include travel and tourism, trade transportation, insurance, education, financial, technical, telecommunications and other business and professional services. In addition there are royalties, payments for capital services besides interest, such as dividends, payments for foreign labor, etc.

19. Overall Surpluses and Deficits What is an overall balance of payments surplus? What is an overall deficit? What is an overall balance of payments surplus? What is an overall deficit? A surplus is when the sum of the current account plus the private capital account is counterbalanced by an accumulation of official net assets, so official reserve assets increase. A surplus is when the sum of the current account plus the private capital account is counterbalanced by an accumulation of official net assets, so official reserve assets increase.

20. Overall Surpluses and Deficits What is an overall balance of payments surplus? What is an overall deficit? What is an overall balance of payments surplus? What is an overall deficit? If it is in deficit, the sum is counterbalanced by an accumulation of official net liabilities, so the country sees its official reserve assets decline. If it is in deficit, the sum is counterbalanced by an accumulation of official net liabilities, so the country sees its official reserve assets decline.

21. The current account balance is the difference between domestic saving and domestic investment. If domestic saving falls, the India must borrow from abroad to finance domestic investment… The current account balance is the difference between domestic saving and domestic investment. If domestic saving falls, the India must borrow from abroad to finance domestic investment… Indian foreign indebtedness is not necessarily bad if foreign funds are used towards investment. Indian foreign indebtedness is not necessarily bad if foreign funds are used towards investment.

22. Repayment of the debt is potentially a problem if foreign funds are used to purchase consumption goods since future generations will bear the burden of debt. Repayment of the debt is potentially a problem if foreign funds are used to purchase consumption goods since future generations will bear the burden of debt.