Balance of Payment

Unit 2 Chapter 4
BoP

Statistical statement

Systematically summarizes
For a specified period of time (generally YoY, Could be
QoQ or MoM also)
All the monetary transactions
of an economy with rest of the world
Officially…

BoP manual (IMF’s publication) says:

BoP is a statistical statement for a given period showing:

Transactions in goods and services between an economy

and rest of the world
Changes of ownership, Gifts, Claims on and Liabilities to
the rest of the world
Entries for the foregoing transactions needed to balance
the offset.
BoT vs BoP
BoT :
Export and Import of visible items (Merchandise Trade)
No Exchange of invisible items like:
Services like shipping, insurance and banking etc.
Payment of interest or dividend
Tourism etc

BoP :
Takes into account Trade of both Visible and invisible items (the current account items)
Capital Account Items like
FDIs, FIIs etc.
External assistance
External lending and borrowing,
NRI Deposits

So which is better ?
Nature of Balance of Payments
A/Cing
Accounting statement
Prepared on a double entry book keeping system

All currency inflows are recorded as credits

Outflows as debits

Credits indicate a positive sign or surplus sign

Debits indicate minus sign or deficit sign

Components of BoP

The various debit and credit entries are grouped under:

1. Current Account
2. Capital Account
3. Unilateral Payments Account
4. Official Reserves Account

For India’s B.O.P :

http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=704
Current Account
Includes all M.Exports:
transactions that Sale of goods abroad (Credit Entry)
increases or use up M.Imports:
National Income
Purchase of goods from abroad (Debit
Entry)

Current a/c : Invisible Exports: Sale of Services

Transportation and insurance in foreign
Merchandise
●

markets
export/Import ● Foreign Tourists in Home Country
● S/W exports

Invisible ● Income received on Loans

Exports/Imports ● Investments abroad (Interests or dividend)
Vice Versa for Invisible imports
Capital Account

It consists of Short Term and Long Term Capital

● Capital outflow  Debit
● Capital Inflow  Credit
for e.g. Airtel invested $ 600 mn in Bangladesh.
This transaction will be recorded as
India’s BoP Bangladesh’s BoP
Debit Credit
$ 600 mn $ 600 mn
Unilateral Transfers Account

Unilateral Transfers are:

Gifts
Private remittances
Disaster Relief

Receivable/ Received  Credit

Made/ Donated  Debit
Official Reserves Account
Holdings by Govt/ Official Agencies

Means of payment

For the settlement of international claims

For e.g. Repayment of Loans taken from

Countries, IMF, World Bank etc.
BoP Disequilibrium

BoP Equlibrium
Exports = Imports
Debits = Credits

Disequilibrium happens on account of:

Deficit
● Imports exceeds exports by a country
Surplus
● Exports by a country exceeds its Imports
Factors Causing
Disequilibrium
Economic Factors

Political Factors

Sociological Factors
Economic Factors

Development Disequilibrium:
Large scale Development Expenditures
Prosperity
Increase In Purchasing Power
More Demand
Large Imports

Cyclical Disequilibrium:
Cyclical Fluctuations in the Business Activity
Boom/Bane
Boom  More Imports
Bane  More Exports
Secular Disequilibrium:
Secular Trends in the economy

● Disposable income is high  Higher Demand

● Higher Demand  Higher Wages

● Higher Wages  Higher Production costs

● Higher Production Costs  Higher Prices

● Imports more than Exports

● Deficit
Political Factors Social
Factors
Political Instability Changes in

Inadequate domestic Tastes

production and investments

Preferences
War

Fashions
Politic relations with the
Super Power
Lifestyle
Correction of Disequilibrium

Automated Correction

Deliberate Correction
Automated Correction
The theory is that if the forces of demand and supply are allowed to
have free play,

Result is an equilibrium

More import  demand for foreign market

New domestic competition
Price War
Cheaper Domestic Product  More Export

Balance is bestowed
Deliberate Measures
Intentionally

1. Monetary Measures

a) Monetary Contraction

a) Devaluation

a) Exchange Control
2. Trade Measures:

a) Export Promotion:
● Abolishing Export duties
● Providing Subsidies
● Indirect Assistances

b) Import Control

● Remember tariffs and Non tariff barriers?

Thank you