Balance of payments

Members: Namrata Sakhare Bhagyashri chaudhari

MMS-25 MMS-39

BOP
.. is the record of the economic and financial flows that take place over a specified time period between residents and non-residents of a given country.

Divided into..
Current account Capital account

Std components of BOP
CURRENT ACCOUNT (+) Export fob (-) Import fob = Trade Balance (+) Exports on Non-financial services (-) Imports on Non-financial services (+) Investment Income(Credit) (-) Investment Income(Debit) +(-) Private unrequited transfers +(-) Official unrequited transfers = Current Account balance = Capital Account balance CAPITAL ACCOUNT +(-) Direct Investment +(-) Portfolio Investment +(-) Other Long term Capital +(-) Other Short term Capital +(-) Net errors and omissions +(-) Counterpart items +(-) Total change in reserves

Current A/cTransactions
Merchandise Export fob Merchandise Import fob Export of a non-financial service Investment Income: Export of a financial service An unrequited Transfer

Capital A/c Transactions
A reserve transaction with a non-resident A reserve transaction with a resident

Gold standard
Definition: A commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money(bank deposits & notes) were freely converted into gold at the fixed price.

Advantages
During war time emergencies govt. emphasizes on purchasing gold standard which would be helpful in post-war deflations. The gold standard limits the power of govt. to inflate prices through excessive issuance of paper currency.

Disadvantages
Gold standard means amount of money would be determined by supply of gold & hence monetary policy could no longer be used to stabilize the economy in times of economic recessions. Monetary policy be determined by the rate of gold production. Fluctuation in the amount of gold that causes inflation if there is an increase or deflation if there is a decrease.

SDR
Special Drawing Rights are defined in terms of a basket of major currencies used in international trade & finance. Why was the SDR created:The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system.

Purpose
SDRs are used as a unit of account by the IMF & several other international organization. SDRs were originally created to replace gold & silver in large international transactions.

International liquidity
International Liquidity meant the relative amount of resources available to a nation’s monetary authorities that could be used to settle a balance of payment deficit.

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