Balance of Payments

MODULE V

Definitions
Defined as a systematic record of all economic

transactions of a country and residents of a foreign country during a certain period of time

Purpose
Useful data for analysis of countries international

trade Reveals the changes in the composition and magnitude of foreign trade Gives indications of future repercussions of countrys past trade performances Can be a guide to improve foreign trade relations

Balance of Payments Accounts

Current Transactions- Current Account

Capital Transactions- Capital Account

Transactions Credit Debit Net Balances Receipts Div.Receipt Receipt Div.Payment Payment Receipt Payment Surplus(+) Deficit(-)

1 2 3 4 5 6 7

Merchandise Foreign Travel Transportation Insurance(prm) Investment Income Government Miscellaneous Current A/c balance

Export Earnings

Import Payments

Balance of Payments Accounts

Current Account divided into visible items and

invisible items and unrequired transfer. The net balance of the visible items is called balance of trade The overall current account balance is carried to the capital account Categories of capital account are i) Short term capital movement ii)long term capital movement iii)changes in the gold and change reserves Balance of Payments account are always in balance

Disequilibrium in Balance of Payments

Arises because total receipts during the reference

period need not always necessarily be equal to the total payment obligation of that period. Transactions are regrouped into autonomous transactions and induced transactions Autonomous transactions-take place on their own due to peoples desire to consume more or make profit Induced transactions for funding deficit

Causes and kinds of Disequilibrium

Price changes

Business Cycles
Structural changes Other factors

Adjustments
Monetary policy

Fiscal policy
Exchange rate