Balance of Payments

Meaning
The balance of payments is a statistical record of all the economic transactions between residents of the reporting country and residents of the rest of the world during a given time period. The usual reporting period for all the statistics included in the accounts is a year. The balance of payments of a country is a systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries.

Domestic and foreign resident

It is important to note that citizenship and residency is not

necessarily the same thing from the viewpoint of the balance-of-payments statistics. The term residents comprise individuals, households, firms and the public authorities, and there are some problems that arise with respect to the definition of a resident. Multinational corporations are by definition resident in more than one country. For the purposes of balance-of-payments reporting, the subsidiaries of a multinational are treated as being resident in the country in which they are located even if their shares are actually owned by foreign residents.

Accounting Principles in Balance of Payments

The BOP is a standard double entry accounting record

and as such is subject to all the rules of double entry book-keeping, viz. for every transaction two entries must be made, one credit (+) and one debit (-) and leaving aside errors and omissions, the total of credits must exactly match the total of debits, that is, the balance of payments must always balance.

Accounting principles
(a) All transactions, which lead to an immediate or prospective payment from the rest of the world (ROW) to the country should be recorded as credit entries. The payments themselves, actual or prospective, should be recorded as the offsetting debit entries. Conversely, all transactions which result in an actual or prospective payment from the country to the ROW should be recorded as debits and the corresponding payments as credits.

Accounting principles
(b) A transaction which results in an increase in

demand for foreign exchange is to be recorded as a debit entry while a transaction, which results in an increase in the supply of foreign exchange, is to be recorded as a credit entry.

Components of Balance of Payments

(a) The Current Account: Under this are included imports and exports of goods and services and unilateral transfers of goods and services.
(b) The Capital Account: Under this are grouped transactions leading to changes in foreign financial assets and liabilities of the country. (C) The Reserve Account-Increase or decrease in foreign exchange reserves maintained by the monetary authority of the country.

The Current Account

Merchandise: In principle, merchandise trade should

cover all transactions relating to movable goods, ie exports and imports.

Invisibles
Invisibles=a+b+c a.) Services =Travel, Transportation, Insurance,

Government, and Miscellaneous.

b.) Transfers: Official and Private (transfer of funds from abroad)

c.) Income Investment income Compensation to Employees

Current Account Balance

The net balance between the credit and debit entries

under the heads merchandise, and invisibles taken together is the Current Account Balance. The net balance is taken as deficit if negative (debits exceed credits); A surplus if positive (credits exceed debits).

The Capital Account

The capital account consists of three major subgroups. The

first relates to foreign equity investments in India either in the form of direct investments or FIIs. The next group is loans- Under this are included concessional loans received by the government or public sector bodies, long and medium-term borrowings from the commercial capital market in the form of loans, bond issues and so forth, and short-term credits such as trade related credits. Disbursements received by Indian resident entities are credit items while repayments and loans made by Indians are debits. The third group separates out the changes in foreign assets and liabilities of the banking sector ie change in reserves.

Collection, Reporting and Presentation

of the Balance-o-Payments Statistics

The balance-of-payments statistics record all the transactions between

domestic and foreign residents, be they purchases or sales of goods, services or of financial assets such as bonds, equities and banking transactions. Reported figures are normally in the domestic currency of the reporting country. Obviously, collecting statistics on every transaction between domestic and foreign residents is an impossible task. The authorities collect their information from the customs authorities, surveys of tourist numbers and expenditures, and data on capital inflows and outflows is obtained from banks, pension funds, multinationals and investment houses. Information on government expenditures and receipts with foreign residents is obtained from local authorities and central government agencies

WHY ARE BOP STATISTICS IMPORTANT

In the short-run, BOP deficits or surpluses may have an immediate

impact on the exchange rate. Basically, BOP records all transactions that create demand for and supply of a currency. They may confirm or indicate a reversal of perceived trends they may signal a policy shift on the part of the monetary authorities of the country, unilaterally or in concert with its trading partners. Movements in a country's reserves have implications for the stock of money and credit circulating in the economy. Countries suffering from chronic deficits may find their credit ratings being downgraded because the markets interpret the data as evidence that the country may have difficulties in servicing its debt.
BOP accounts are intimately connected with the overall saving-

investment balance in a countrys national accounts; Continuing deficits or surpluses may lead to fiscal and monetary actions designed.