1. BALANCE OF PAYMENT
Chapter 3

2. BOP
It is the systematic summary of the economic transactions of the residents of a country with the outsiders.
An economic transaction arises when values are exchanged or moved between nations.

3. Features

4. Economic transaction-
Export and import
rendering of services,
gift & grants from one country to another,
Investments made or received
Increase or decrease in international reserves

5. Resident with non residents
Residents may mean individuals, institutions, corporate bodies, government departments, branches or units of MNCs

6. A flow statement
It is compilation of flow of economic transaction of the country during the period and not a statement of the position as on date.

7. Periodicity
It is prepared of one year.

8. Components of BOP

9. I) Current account
It covers all transactions between residents & non residents, other than financial items.

10. 1) Merchandise trade
It represents exports and imports of commodities from / into India.
The credit in the item represents exports and debit represents imports.
The net balance, being the difference between exports and imports is known as balance of trade.

11. When the aggregate exports of goods from the country during the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

12. 2) Invisibles A) Services B) Transfers C) Investment income Travel
Transportation
Insurance
Miscellaneous
B) Transfers
Official
Private
C) Investment income

13. II) Capital account
It represents transfer of money and other capital items and changes in the country’s foreign assets and liabilities resulting from the transactions recorded in current account.

14. 1. Foreign investment 2. Loans 3. Banking capital
In India
Direct
Portfolio
Abroad
2. Loans
External assistance
By India
To India
Commercial borrowings
Short term to India
3. Banking capital
Commercial banks
Assets
Liabilities
Non residents deposits
Others
4. Rupee debts service
5. Other capital

15. III) Official reserve account
Official reserves are government owned assets.
The official reserve account represents only purchases and sales by the central bank of the country.

16. Example..
If a country has a BOP deficit, the central bank will have to either run down its official reserve assts such as gold, foreign exchange and SDR or borrow fresh from foreign central banks.
Or if a country has a BOP surplus, its central bank will either acquire additional reserve assts from foreigners or retire some of its debt.

17. BOP accounting principles..

18. Credit transactions (+)
Are receipts of payment from foreigners.
Like-
Exports of goods or services
Unilateral transfers (gifts) received from foreigners
Capital inflows

19. Capital inflows It can take either of the two forms-
An increase in foreign assts of the nation.
A reduction in the nation’s assets abroad.

20. Example..
A US resident purchases an Indian stock. This is a capital inflow to India because it involves the receipt of a payment from a foreigner and thus foreign assets in India go up.
When an Indian resident sells a foreign stock. This is a capital inflow to India because it involves receipt of a payment from a foreigner, thus Indian assts abroad decreases.

21. Debit transactions (-)
Are the payment of foreign exchange.
Like-
Imports of goods and services
Unilateral transfers (gifts) made to foreigners
Capital outflows

22. Capital outflow It can take either of the two forms-
An increases in the nations assets abroad.
A reduction in foreign assets abroad.

23. Example
Purchase of a UK t –bill by an Indian resident. This results in an increase in the Indian assets abroad & is a debit transaction since it involves a payment to foreigners.
Sale by a US firm of an Indian subsidiary. This results in reduction in foreign assets in India and is entered as a debit transactions.

24. BOP disequilibrium
BOP is said to be in equilibrium when the demand for foreign exchange is exactly equivalent to the supply of it.
It is at disequilibrium when it shows either a surplus or deficit.
There will be deficit in BOP when the demand for foreign exchange exceeds its supply, and there will be a surplus when supply for foreign exchange exceeds the demand

25. Factors.. 1) Economic 2) Political 3) Social
Development disequilibrium
Cyclical disequilibrium
Secular disequilibrium
Structural disequilibrium
2) Political
3) Social

26. Correction of disequilibrium

27. contraction/ expansion
Monetary
contraction/ expansion
2. Devaluation/
Revaluation
3. Exchange control
Foreign loans
2. Incentives for
foreign investments
3. Tourism
development
4. Incentives for
foreign remittances
5.Import substitution
Export promotion
Abolition / reduction
of export duties
2. Export subsidies
3. Export incentives
Import control
Import duties
Import quotas
Import
prohibition