BALANCE OF PAYMENT

Balance of payments is an account which records the transactions in goods and services and assets between resident of
a country with the rest of the world. It has two main accounts capital and current account.

BOP A/C

Credit Debit

Export of goods Imports of goods } visible trade

Export of services Imports of service} invisible trade
Unilateral receipts Unilateral payment} unilateral transfer
Capital receipt Capital payment

Component of current account:-

1.Export and import of goods → It is also called visible trade
• Examples – steel, machinery, rice etc.
• Balance of trade = value of exports of goods – value of imports of goods.

2.Export and import of services→ It is also called invisible trade.

• Examples- insurance, banking , tourism etc.

3.Transfer receipt and payments→

• Unilateral or transfer are receipts which the residents of a country receive, or payments that the resident of a
country pay without getting anything in return.
• Examples → donations, gift etc

Components of capital account :-Capital account record receipts and payments of such transactions which cause an
impact on assest –liability status of a country in relation to rest of world
• Borrowings External assistance
• Foreign direct investment . Portfolio investment

Difference between autonomous and accommodating transaction.

Autonomous transaction Accommodating transaction

1) These take place due to some economic 1) These take place to correct deficit
Motive like profit. or Surplus in autonomous transaction.
2) these are independent transactions. 2) these are dependent on autonomous transactions.
3) these transaction are called “above the line”. 3) these transactions are called below the line”.

Difference between balance of payment and balance of trade.

Balance of payment Balance of trade
1) it records the transaction of goods, 1) it records the transactions of goods only.
Services and capital.
2) it is always in balance. 2) it may be favorable, unfavorable or in Equilibrium.
 3) it is wider concept 3) it is narrower concept and a part of Balance Of payment.

Difference between balance of trade and balance of current account.

Balance of trade Balance on current account
1) it records transactions relating to 1) it records transactions relating to both goods,
goods only. Services and unilateral transfer.
2) it is narrower concept. 2) it is a wider concept and includes balance of Trade.
3) it is indicator of difference of imports and exports. 3) it is an indicator of difference between Receipts.

Difference between balance of payment deficit and surplus

Bop deficit Bop surplus

1) when the total inflows on account of 1) when the total inflows on account of
autonomous transactions is less than total autonomous transaction is more than total
outflows on account of such transactions outflows on account such transaction there is
there is BOP deficit BOP surplus

Difference between debit and credit of BOP

Debit Credit
1) any transaction resulting in payment to 1) any transaction resulting in a receipt from
foreigners is entered as debit. Foreigners is entered as credit.
2) examples – imports of goods & services 2) examples- exports of goods and services.
Differentiate between current account and capital account of BOP.

Sl.
Current Account Capital Account
No.
i It is the account which records It records capital transactions such as
exports and imports of goods, loan and investment between a

services and unilateral transfers. country and rest of the world.

ii Items of current account do not Items of capital account cause

cause change in the assets and change in the assets and liability

liability status of the residents of status of the residents of a country &

a country & its government. its government.

iii The main components of current The main components of capital

account are export and import of account are private Capital
goods, services and unilateral transaction, official Capital
transfers. transaction and baking Capital
transaction etc.
OFFICIAL RESERVE TRANSACTIONS are the transactions carried on by monetary authorities of a country ,which causes
changes in official reserve. The significance of such transactions is to cover a deficit or surplus on balance of payment
*The central bank may finance a deficit through official reserve sale
*It may use surplus of bop to purchase foreign securities,foreign currency,gold etc
-----000------