BALANCE OF PAYMENTS

PRESENTED BY
SHAMROZE SAJID
 BALANCE OF PAYMENTS

• The balance of payments (BOP) is the method countries use to

monitor all international monetary transactions at a specific
period of time. Usually, the BOP is calculated every quarter and
every calendar year.

• All trades conducted by both the private and public sectors are
accounted for in the BOP in order to determine how much money
is going in and out of a country.
 HOW TO CALCULATE BALANCE OF
PAYMENTS ??

• OVERALL BALANCE = CURRENT A/C + CAPITAL A/C + FINANCIAL

A/C + ERRORS & OMISSION
 CURRENT ACCOUNT
This is a record of all payments for trade in goods and services plus
income flow it is divided into four parts.

• Balance of trade in goods (visible)

• Balance of trade in services (invisibles) e.g. tourism, insurance
• Net income flows (wages and investment income)
• Net current transfers (e.g. Government AID)
 CAPITAL ACCOUNT

• Capital transfers related to purchase and sale of fixed

assets.
• For example, a physical asset such as land) and non-
produced assets, which are needed for production but
have not been produced, like a mine used for the
extraction of diamonds.
 FINANCIAL ACCOUNT
This is a record of all transactions for financial investment. It
includes:

• Net investment from abroad. (e.g. A UK firm buying a factory in

Japan would be a debit item)
• Net portfolio investment.
• Reserves.
 Errors and Omission
• Missing data such as illegal transfers.
• It is of a balancing entry and is needed to offset
the overstated or understated components.
• Account is used to account for statistical errors
and/or untraceable moneys within a country.
 BALANCE OF TRADE
• The balance of trade, is the difference in value between the total exports &
total imports of a nation during a specific period of time.

• CALCULATION
NX = Net Exports – Net Imports

• A Positive balance is kwon as trade surplus. A Negative balance is kwon as a

trade deficit
IMPORTANCE OF BALANCE OF PAYMENTS

• State of International economic relationship of country

• A guide to its monetary, fiscal, exchange polices.
• Inform govt about the international economic position of the
country, to assist in reaching decisions on the monetary and
fiscal polices
 FACTORS AFFECTING BALANCE OF
PAYMENTS

• High rate of consumer spending on imports (during economic boom).

• Decline in international competitiveness making countries exports less
competitive.
• Overvalued exchange rates which makes exports relatively more expensive.
What Balance of Payments Analysis
Show ?

whether it is paying for its import through

exporting goods, drawing down its foreign
assets or receiving donations.
DISEQUILIBRIUM IN THE BALANCE OF
PAYMENTS

A disequilibrium in the balance of payment means its

condition of surplus or deficit.
 CAUSES OF DISEQUILIBRIUM IN THE
BALANCE OF PAYMENT

• Cyclical fluctuations
• Short fall in the exports
• Economic Development
• Rapid increase in population
• Structural Changes
• Natural Calamites
• International Capital Movements
 MEASURES TO CORRECT ADVERSE
BALANCE OF PAYMENT

EXPORT LED GROWTH

• Instead of exporting Raw material should export Finished Goods.
• Reduction in Export Duties.
• Export Quality Products.
 MEASURES TO CORRECT ADVERSE
BALANCE OF PAYMENT

REDUCTION IN IMPORTS

• Import of Only Essential Items

• Exchange Control
• Substitutes for Imported Items
 MEASURES TO CORRECT ADVERSE
BALANCE OF PAYMENT
Miscellaneous

• Population Control
• Improved Law & Order Situation
• Control of smuggling
• Capital Formation
• Power development
• Building of infrastructure
Food For Thought

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