BALANCE OF PAYMENT

(International Flow of Fund)

1. Definition: It is a record of all international economic transactions of a country with the rest of
the world during a particular period of time. It can also be defined as the record of all international
receipts and payment of a country during a particular period of time. This recording is done by
the Central Bank on the basis of double entry book keeping system, which means each and every
international economic transaction, Central Bank will be giving entries: one debit entry and one
credit entry.
2. Categorization of International Economic Transaction/BOP Accounts:
i. Current A/C: Trade in Goods (exports and imports); Trade in Services (travelling,
transportation, education, medical treatments, consultancy, military and diplomatic
expenditure); Primary Income (Income out of foreign investment); Secondary Income
(foreign grants, gifts and labor remittance.
ii. Capital A/C (Capital Transfer): Interest waiver, principal waiver and investment waiver.
iii. Financial A/C: All sorts of foreign investment (FDI and FPA), foreign loan and its perceiving,
banking and non-banking claims.
iv. Errors and Omissions/statistical Discrepancy A/C: Adjustment debit summation and credit
summations.
v. Official Reserve A/C: Gold holding, SDR holding, IMF Reserve, FC holding of the
government.

3. BOP Performance Indicators:

i. Trade Balance = Export – Import
ii. Current A/C Balance = Trade Balance (TB) + Service Balance (SB) + Primary Income +
Secondary Income.
iii. Overall Balance = CAB + CT + FA + EO.

4. Factors Affecting International Trade:

i. Cost of labor
ii. Inflation
iii. National income
iv. Government policies
v. Exchange rate
5. Factors Affecting FDI:
i. Changes in restrictions
ii. Privatization
iii. Potential economic growth
iv. Tax rate
v. Exchange rate
6. Factors Affecting FPI:
i. Tax rates on interest or dividends
ii. Interest rates
iii. Exchange rates.