BALANCE OF

PAYMENTS
CONCEPTS AND
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COMPONENTS
MEANING
• The balance of payment is a summary of all the international transaction
of a country and its citizens during a specified period of time usually a
year.
• B = R-P
• If R>P, there will be surplus balance of payments.
• If R<P, there will be deficit in payments
• If R=P, it means equilibrium in BOP
 • The BOP account of a nation follows the
STRUCTURE double entry book keeping system.
OF BOP • Each IN transaction is recorded twice once on
ACCOUNT the credit side and once on the debit side of
equal amount.
• It is done because every transaction has two
sides. Credits are shown on the left side and
debits are on the right side.
STRUCTURE OF BOP:
 TRADE BALANCE OR BALANCE OF TRADE
• This account includes the imports and exports of visible items during a given year.
Trade balance means exports(X) – imports(M).
• If X>M, then BOT is favorable
• If X<M, then BOT is unfavorable
• If X=M, then BOT is Balanced
 2. CURRENT ACCOUNT
• The current account includes trade balance, net non-monetary gold movements and
the net of invisible exports and imports.
• The invisible imports and exports all concerned with net receipts or payments due to
foreign travel, transportation, insurance, investment income, net govt. Receipts and
payments not included elsewhere and transfer payments both official and private.
3. CAPITAL ACCOUNT
• The capital account in India of BOP account includes the net private non-banking
short term and long term capital receipts or payments, net banking receipts or
payments excluding those of RBI and net miscellaneous govt. Receipts and payments.
4. ACCOUNT OF FINANCING
• The surplus or deficit on account of current account, capital account and errors and
omissions is financed through external assistance, gross drawing from the IMF,
allocation of SDR's and increase(-) or decrease(+) in reserves.
BOP ACCOUNT OF INDIA
• 1 Imports (M) 2 Exports (X) 3 Trade Balance: (X-M) or 2-1
• 4 Invisibles a) Receipts b) Payments c) Net
• 5 BOP on Current Account (3+4): Trade balance + Invisibles
• 6 Capital Account: Net foreign investment+ Net external assistance+ Net
commercial borrowing+ Net Banking+ Rupee best service+ Other capital+ Errors and
Omissions
• 7 Total Capital
• 8 Overall BOP (5+7),i.e., BOP on Current account +Total capital
• 9 Monetary Movements: a) IMF transactions(Net) b) Increase(-) Decrease(+) in Reserves
• 10 Total: (8) +(9): Overall BOP + Monetary Movements
BALANCE OF TRADE AND BOP

• Balance of Trade: it is the difference between the value of goods

exported by the home country in exchange of imports of goods by it
from abroad.
• X=M, Balance in the Balance of Trade
• X> M, Surplus in Balance of Trade
• X< M, Deficit in Balance of Trade
BALANCE OF PAYMENTS
THE BASIC BALANCE
THE OVERALL BALANCE OF PAYMENTS
ECONOMIC BAROMETER OF THE COUNTRY
IS BOP ALWAYS IN BALANCE
• The BOP is a statement of IN transactions expressed in terms of debits and credits
based on double entry system of book keeping.
• If all the entries are made correctly, the total debits must be equal to total credits.
• Each transaction is expressed through entries of equal amounts on the opposite sides of
the BOP account.
• In the accounting sense, the BOP remains always in a state of balance.
• Total injections are exactly equal to total withdrawals in the system.
• I+ G + X = S+T+M.
• Investment+ Govt. expenditure+ Exports = Saving + Taxes+ Imports
DISEQUILIBRIUM OF BOP
CAUSES OF DIS EQUILIBRIUM

• Natural factors
• Changes in cost price structure of export industries
• Expenditure on Embassies
• Development schemes
• Rate of foreign exchange
• Change in demand
• Trade cycles
• Import of services
 ------------------ CONTINUED

• Demonstration effect
• Population explosion
• Foreign capital investment flow
• Political factors
• IN economic practices and policies
MEASURES TO CORRECT ADVERSE BOP
NON MONETARY MEASURES