BALANCE OF TRADE &

BALANCE OF PAYMENT
• BOP is a double entry system of record of all
economic transactions between the residents of a
country and the rest of the world, carried out in a
specific periodSaniya
of a Shiurkar,MNLU,Aurangabad.
time.
• It classified record of:
• All receipts on the account of goods exported.
• Services rendered.
• Capital received by residents.
• Payment made by residents due to goods imported
and services received from.
• Capital transferred to non- residents or foreigners.
• BOP is a statistical statement for a given period
showing:
• Transactions in goods and services and income
between an economy and rest of world.
Saniya Shiurkar,MNLU,Aurangabad.

• Changes of ownership and other changes in

country’s monitory gold, SDR’S claims, and liabilities
to the rest of world.
• BOP takes into consideration export and import of
goods of all kind including consumer goods,
consumer durables, FMCG ,services like banks,
insurance, transport etc.
 MONITORY GOLD?

Is a gold owned by the authorities who are subject to

effective control of authorities & held as reserve
asset.
Saniya Shiurkar,MNLU,Aurangabad.
 SDR?

• Stands for Special Drawing Rights.

• Is an interest bearing international reserve asset
created by IMF in 1969 to supplement other reserve
assets of member countries.
Saniya Shiurkar,MNLU,Aurangabad.

• Is a basket of international currencies like US Dollar,

Japanese Yen, Euro, Pound, Chinese Renminbi.
• BOP takes account of both export, import, visible
and invisible items.
 COMPONENTS OF BOP

• CURRENT ACCOUNT
• CAPITAL ACCOUNT
• UNILATERAL PAYMENT ACCOUNT
Saniya Shiurkar,MNLU,Aurangabad.
• OFFICIAL SETTLEMENT ACCOUNT
• Current Account:
• Includes visible exports and imports and invisible
items say Receipts and payments of services like
banking , insurance , transportation ,tourism , travel .
Saniya Shiurkar,MNLU,Aurangabad.

• Contains credit and debit.

• Credit= merchandise exports i.e; money income
from sale of goods + invisible exports i.e; income
from services +insurance services + transport
services+ foreign tourist services+ other services sold
abroad+ income received on loans and investment
abroad.
• Debits of current account includes:

• Merchandise import+ payment for goods

Saniya
purchased from Shiurkar,MNLU,Aurangabad.
foreign countries+ invisible imports

• (payment of services received from foreign

countries+ transport services+ insurance service +
tourism abroad+ services purchased from foreign
countries+ payments on loan+ investments of
foreigners in India)
• 2 major items of current account are

Merchandise exports and imports

Saniya Shiurkar,MNLU,Aurangabad.
Invisible exports and imports

• Most of the transactions are on credit basis.

• Merchandise imports= purchase of goods from

foreign country.
• IMF manual classifies invisible account into 121 items
while Indian authorities classified into 8 heads:
• Travel, transportation, insurance, investment,
miscellaneous(Saniya
payments for patents and royalties),
Shiurkar,MNLU,Aurangabad.
transfer payment official, transfer payment private
etc.
• Invisible exports includes sale of services to
foreigners like insurance, tourism, transportation,
banking, finance services.
• BOP position of India on current account was
satisfactory in first 5 years plan
• During this phase or period the inflow of foreign
capital was 13.60
SaniyacrShiurkar,MNLU,Aurangabad.
and foreign exchange reserve
was 127 cr. Deficit of current amount was 42.30 cr.
• India enjoyed surplus in current account of BOP
during 2001-02 to 2004-05 due to increase in net
invisible but suffered from deficit in 2005-06.
• During second 5 year it was in deficit.
• Reasons for Deficit Balance:
• Because government of India has liberalized imports in
1985 by announcing liberalized export-import policies
• This policy lead toSaniya Shiurkar,MNLU,Aurangabad.
increase the imports
• Gulf war influenced Indian economy adversely and
contributed vitally for 1990-91 BOP crisis
• Rapid industrialization led to import of capital goods,
import of technology, machinery, technical personnel
etc. this in turn increase imports.
• In 1990-91 BOP crisis and political instability made the
govt. to borrow massively from IMF
• CAPITAL ACCOUNT:

• Classified as – private
banking
Saniyacapital
Shiurkar,MNLU,Aurangabad.
official capital
• Private account further classified as long term and short term

• Long term private capital gets classified into:

• Foreign investments
• long term loans
• Foreign currency deposits
• Unclassified receipts
• Banking capital:

• Movements in external financial assets + liabilities of

commercial andSaniya Shiurkar,MNLU,Aurangabad.
cooperative banks authorized to deal
in foreign exchange.

• Capital outflow from home country to foreign country is

treated as a credit item.

• Eg: Reliance invest rs.1 billion in kingdom of Saudi Arabia

it will be represented as debit item in India's BOP and
credit item in BOP of kingdom of Saudi Arabia.
• Capital account = credit + debit
• Credit includes foreign long term investments in
home country ( FDI in home country)
• Debit includes Saniya Shiurkar,MNLU,Aurangabad.
long term investments in foreign
country eg: direct investment abroad, investment in
foreign securities and government loans to foreign
countries and short term investment abroad.
• There would be either interest payment or dividend
payment on capital inflow .
• Unilateral Transfers Account:

• UTA are giving the gifts

• Includes government grants, reparations, disaster relief
etc. Saniya Shiurkar,MNLU,Aurangabad.

• India gave grant to Uganda in 1998

• This item was on debit side in India's BOP and credit side
in Uganda’s BOP.
• UTA basically consists of credit and debit.
• Credit includes private remittances received from
abroad( like savings of Indians working in various
countries), government grants received from abroad.
Debit includes private remittances to abroad,
government grants to various countries.
• Official settlement account:
• This represents official sales of foreign currencies or
official purchase of foreign currencies from foreign
countries. Saniya Shiurkar,MNLU,Aurangabad.

• This is the debit of this account

• Whereas money received from official sale of
foreign currencies and offer reserves in foreign
countries
• This is credit of this account
• Disequilibrium in BOP:
• When the demand for and supply of foreign currency of
country are equal, its viewed that BOP of that country is in
equilibrium position.
Saniya Shiurkar,MNLU,Aurangabad.

• Some countries enjoy a surplus position (I.e.; supply of

foreign currency is more than that of demand)
• Both the surplus and deficit position represents disequilibrium
in BOP.

• Almost all countries in reality experience either a deficit

position or surplus position.
• Causes of Disequilibrium:
Economic factors
Political factors
Saniya Shiurkar,MNLU,Aurangabad.
Sociological factors
• Economic factors:
further classified as
Development disequilibrium
Saniya Shiurkar,MNLU,Aurangabad.
Cyclical disequilibrium
Secular disequilibrium
Structural disequilibrium
• Development disequilibrium:
• Developing countries mostly take up the developmental
activities like establishment of industries, construction of
roads, bridges, power plants and infrastructure facilities
Saniya Shiurkar,MNLU,Aurangabad.
like hospital, educational institute etc.
• These activities primarily increase imports of capital
goods, machinery and equipment.
• Also expenditure in developmental activities results in
income of people, aggregate demand, prices and
increase of imports of consumer goods.
• Development expenditure results an increase of capital
goods and consumer goods imports. This in turn leads to
deficit in BOP
• Cyclical disequilibrium:
• Concerned with fluctuations in imports and exports due
to business cycles.
• The boom in business activity in one country increases
Saniya Shiurkar,MNLU,Aurangabad.
consumption aggregate demand and prices more than
production.
• Therefore countries experiencing boom conditions
import consumer goods immediately to meet the
increased aggravated demand.
• Boom conditions increase import of capital goods in
order to established new or expand existing production
capacities, boom condition increases the imports.
• In contrast depression conditions contribute to the
growth in exports as the production is higher than
aggregate demand and consumption.
• Both boom and depression
Saniya results in disequilibrium
Shiurkar,MNLU,Aurangabad.
in BOP.
• Secular disequilibrium:
USA is one of the developed countries, it experiences
deficit balance of payment position continuously
Saniya within
This creates inclination Shiurkar,MNLU,Aurangabad.
the US reason behind
problems faced by USA is disequilibrium of BOP
continuously.
BOP persists for longer time due to secular trends in
economy.
Eg: disposable income of people in developed countries
is very high, this in turn increases the cost of production
factors and prices of goods.
• Consequently developed countries prefer to import
goods from counties where quality goods are
produced at lower cost of production.
• Increase situation ofShiurkar,MNLU,Aurangabad.
Saniya imports results in secular deficit
in BOP.
• Structural disequilibrium:
• Structural changes in economy includes shift from
agriculture sector to service sector changes in
transport channels
Saniyaand costs.
Shiurkar,MNLU,Aurangabad.

• These structural changes enhance imports of

capital goods and consumer goods resulting in BOP
deficit.
• Political factors:
• Like political uncertainties, instability, Internal
disturbances and external war creates a
threatening situation for industry and investments.
Saniya Shiurkar,MNLU,Aurangabad.

• Social factors:
• Additions to and dropouts from the existing culture,
changes in tastes , fashions and preferences of
people contribute to increase in imports and deficit
in BOP.
 METHODS OF MANAGING
DISEQUILIBRIUM
Automatic correction
Deliberate measures
Trade measures
Saniya Shiurkar,MNLU,Aurangabad.
Miscellaneous methods
• India’s BOP crisis:
• India had suffered from deficit in balance of trade
continuously since 1979-80
Saniya balance
• But enjoyed surplus Shiurkar,MNLU,Aurangabad.
of net invisibles from
1970-80 to 1989-90
• As stated earlier the reasons for BOP crisis of 1990
include the economic and import liberalizations,
heavy imports, devaluation of rupee, gulf war,
declining balance of invisible account
• Government of India has taken up several
measures to manage the BOP crisis these include:
• Import control: India should reduce the
dependency on foreign
Saniya countries in which it has
Shiurkar,MNLU,Aurangabad.
productive capacities e.g. India can stop the
import of iron and steel, fertilizers.
• Export promotion: India should encourage the
exports of engineering goods, processed foods,
fruits, handicrafts.
• Unified exchange rate: under this the exchange
value of the rupee is determined by the market.
• Current account convertibility: current account
convertibility relates to the elimination of restrictions
Saniya Shiurkar,MNLU,Aurangabad.
on payments relating to current account.
• Under this system exchange rate was unified and
transactions on current account were freed from
exchange control in march 1993.
• Liberalized export policy to encourage and boost
exports.