GLS UNI – SEM III

MBA (2018-20)

PROF. SANDEEP R. SHROFF

ACADEMIC DIRECTOR, CPIPT

Balance of
Payments

International M1 – P3
GLS UNI – SEM III
MBA (2018-20)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

Demand and Potential as Performance

First

Third
Second
supply of a a business in int’l.
country’s partner for economic
currency the ROW competition
i.e., i.e., more i.e., is the
potential for of an output
appreciation importer competitive
or or an or not
depreciation exporter

IF - Balance of GLS UNI - MBA - 2018-20

Payments

• The BoP is a statistical statement that comprises transactions

between residents and non-residents (RoW) during a period
• It consists of –
• The current account (goods and services account, the primary
income account, the secondary income account),
• the capital account, and
• the financial account
• The different accounts within the BoP are distinguished
according to the nature of the economic values provided and
received, under the double-entry system of accounting in the
BoP

International M1 – P3
GLS UNI – SEM III
MBA (2018-20)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

Credit (Inflow of FC) (+) Debit (Outflow of FC) (–)

• Exports of goods and • Imports of goods and
services services
• Income receivable • Income payable
• Unrequited (unilateral) • Unrequited (unilateral)
transfer receipts transfer payments
• Reduction in foreign assets • Increase in foreign assets
• Increase in foreign liabilities • Reduction in
foreign liabilities

IF - Balance of GLS UNI - MBA - 2018-20

Payments

• Market Price Basis:

• For merchandise trade, market price is the price payable by the
buyer after taking into account any rebates, refunds,
adjustments, etc. from the seller
• Imports and exports of general merchandise are recorded at
free on board (FOB) values, which take into account any export
taxes payable or any tax rebates receivable
• Transactions in financial assets and liabilities should be
recorded exclusive of any commissions, fees, and taxes
whether charged explicitly, included in the purchaser’s price,
or deducted from the seller’s proceeds

International M1 – P3
GLS UNI – SEM III
MBA (2018-20)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

• For barter transactions, provision of goods and services without

a charge, and goods under financial lease, valuation based on
market-price-equivalents be worked out as these provide an
approximation for market prices
• For valuing transactions between affiliated parties, one may have
no choice but to accept valuations based on explicit costs
incurred in production or any other values assigned by the
enterprise
• At times it is not feasible to use the actual transaction
exchange rates. Therefore, average rates for the shortest
period are recommended, though daily average exchange
rates provide a good approximation

IF - Balance of GLS UNI - MBA - 2018-20

Payments

•Accrual Basis:
• Merchandise goods, financial assets/liabilities, and transfer
payments accrue when change in economic ownership
takes place
• Services are recorded as they are rendered and not
when payments are made
• Distributive transactions (compensation of employees,
social contributions, and interest and dividend payments)
are recorded at the moment when the related claims arise,
i.e., when the amounts payable accrue

International M1 – P3
GLS UNI – SEM III
MBA (2018-20)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

• Merchandise:
• Exports – Imports = Trade Surplus (Deficit)
• Invisibles
:
• Services
• Unilateral Transfers –
• In kind (Second effect in exports or imports)
• In cash (Second effect in balances with banks)
• Income
• Total Credit – Total Debit = Current Account Surplus (Deficit)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

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GLS UNI – SEM III
MBA (2018-20)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

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•Capital Account movements include international

purchase and sale of domestic and foreign non-
produced non-financial (real) assets
•Financial Account includes transactions in
financial investments, loans, banking capital etc.
•Total Credit – Total Debit = Capital Account Surplus
(Deficit)

International M1 – P3
GLS UNI – SEM III
MBA (2018-20)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

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IF - Balance of GLS UNI - MBA - 2018-20

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International M1 – P3
GLS UNI – SEM III
MBA (2018-20)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

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•Errors and Omissions:

• While BoP accounts are, in principle, balanced,
imbalances may occur in practice on account of
imperfect compilation procedures and different data
sources
•Monetary Movements:
• It is a reconciling item which highlights the net change
in official reserves of a country due to current account
and capital account flows i.e., overall BoP surplus
(deficit)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

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International M1 – P3
GLS UNI – SEM III
MBA (2018-20)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

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• BCA + BKA + BRA = 0

• where:
• BCA = balance on the current account
• BKA= balance on the capital account
• BRA = change in the reserves account
• If BCA and BKA are deficits, reserves will reduce; and if
deficit persists, a country me be forced to devalue its
currency
• Under pure flexible exchange rate regime, BCA = – BKA i.e.,
central banks will no intervene in the foreign exchange
markets and central banks do not need to maintain official
reserves

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•Official Reserve Assets:

•Foreign currency assets
•Gold
•Special drawing rights (SDRs)
•Reserve positions in the International Monetary
Fund (IMF)

International M1 – P3
GLS UNI – SEM III
MBA (2018-20)

IF - Balance of GLS UNI - MBA - 2018-20

Payments

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International M1 – P3