Balance of Payments

International Finance

International Finance @ IIT Kharagpur © G S Hiremath

BOP

• Balance of payments accounting

• Sources and uses of funds

• Balance sheet and Income statements vs Balance of payments

• Reduction and increase in assets

Credit and Debit (export and import of goods & services)

Sources of data and accounting system

International Finance @ IIT Kharagpur © G S Hiremath

BOP

CURRENT ACCOUNT

Exports and imports of goods (Merchandise)

Export = credit = source (+)

Import = debit = use (-)

Exports and imports of services

Investment income (Dividends, interest, earnings of foreign subsidiaries)

Unilateral transfers

• Accrual to subsidiaries
• Errors and omissions

International Finance @ IIT Kharagpur © G S Hiremath

BOP
Sources of foreign exchange (credits) Uses of foreign exchange (debits)

Merchandise exports Merchandise imports

Travel expenses by foreigners in home country Travel expense by residents abroad

Transportation receipts (of domestic firms from Transportation expenses (by residents for foreign
nonresidents) services)

Fees and royalties paid from abroad to residents Fees and royalties paid to nonresidents

Income received from foreign investment Interest and dividends earned by nonresidents

Unilateral transfers (official grants and private Unilateral transfers – official grants and private
remittances) remittances

Increases in foreign liabilities Increase in foreign assets

International Finance @ IIT Kharagpur © G S Hiremath

BOP

CAPITAL ACCOUNT
• Accounting confusions (assets and liabilities, terms, type of capital)

• Conceptual problems (flow of capital and opposite flow of asset item)

• Components: Short term and long term capital

International Finance @ IIT Kharagpur © G S Hiremath

BOP

Official Reserves
• Gold, foreign currencies, interest bearing deposits, foreign government
securities, SRDs

• Gold movement

• Statistical discrepancy (errors and omissions)

• Trade data Vs. Services data

• Smuggling

International Finance @ IIT Kharagpur © G S Hiremath

BOP: An Hypothetical Example
Merchandise
Exports + 6000
Imports - 4500
BOT + 1500
Services + 100
Balance on G & S + 1600
Transfers (Net) - 150
Current account balance + 1450
Long term capital - 2300
Basic Balance - 850
Short term capital + 200
Errors and omissions - 300
Overall balance - 950
Official settlement balance + 950
Reserves + 950

International Finance @ IIT Kharagpur © G S Hiremath

BOP

• Balance of Trade and Balance of Goods and Services

Large deficits – Policy actions (?)

Deficit is good and bad – when(?)

• Current account balance

Is surplus profit?
Negative or deficit: How to finance?
FDI Vs FPI (+utilization)
Composition of Imports

• Basic Balance: Is it responsive to interest rate or policy variables?

• Reserves: Free floating Vs Intervention

International Finance @ IIT Kharagpur © G S Hiremath