BALANCE OF PAYMENTS

MEANING AND COMPONENTS

” . • According to Soderston.MEANING OF BALANCE OF PAYMENTS • The Balance of payments of a country is a systematic record of all its economic transactions with the outside world in a given year. “the balance of payments is merely a way of listing receipts and payments in international transactions for a country.

OFFICIAL SETTLEMENTS ACCOUNTS (a) Increase in Foreign Official Holdings o (a) Increase in Official Reserve of Gold and Foreign Currencies 4.STRUCTURE OF BALANCE OF PAYMENTS ACCOUNTS CREDITS(+) (RECEIPTS) 1. ERRORS AND OMISSIONS . CURRENT ACCOUNT DEBITS (PAYMENTS) EXPORTS (a) Goods (b) Services (c) Transfer payments 2. CAPITAL ACCOUNT IMPORTS (a) Goods (b) Services (c) Transfer payments (a)Borrowing from foreign countries (a)Lending to foreign countries (b)Direct Investments by foreign countries (b)Direct Investments to foreign countries 3.

charitable donations etc. . received from individuals and governments to foreigners. • Transfer payments relate to gifts. pensions.CURRENT ACCOUNTING • The current account of a country consists of all transactions relating to trade in goods and services. income and payments of foreign investments. insurance. • Service transactions include costs of travel and transportation. foreign aid. private remittances..

CAPITAL ACCOUNTING • The capital account of a country consists of its transactions in financial assets in the form of short term and long term lending and borrowings. . and represents a change in the county’s foreign assets and liabilities. the capital account shows international flow of loans and investments. • Private and Official Direct Investments. • In other words.

. holdings of its convertible foreign currencies and SDR’s. and its net position in the IMF. • The official reserve assets of a country include its gold stock.THE OFFICIAL SETTLEMENTS ACCOUNT • The official settlement account measures the change in nation’s liquidity and non liquid liabilities to foreign official holders and the change in a nation’s official reserve assets during the year.

.ERRORS AND OMISSIONS • Errors and omissions is a balancing item so that total credits and debits of the three accounts must equal in accordance with the principle of double entry book-keeping so that the balance of payments of a country always balances in the accounting sence.

• Balance of payments always balance means that the algebraic sum of the net credit and debit balances of current account. • If Rf-Pf<0. there is surplus in the balance of payments. • If Rf-Pf>0. capital account and official settlement account must equal zero. IS BALANCE OF PAYMENTS ALWAYS IN EQUILIBRIUM? . • Balance of payments is written as B= Rf – Pf where B=balance of payments Rf= receipts from foreigners Pf= payments made to foreigners • If B=Rf-Pf = 0.the balance of payments is in equilibrium. there is deficit in the balance of payments.

• If the total debits are more than total credits in the current and capital accounts. if the total credits are more than total debits in the current and capital accounts. • The deficit can be settled with an equal amount of NET CREDIT balance in the official settlements account. including errors and omissions. including errors and omissions. the net DEBIT BALANCE measures the DEFICIT. MEASURING DEFICIT OR SURPLUS IN BALANCE OF PAYMENTS . • The surplus can be settled with an equal amount of NET DEBIT balance in the official settlements account. the NET DEBIT balance measures the SURPLUS. • On the contrary.

etc.. etc. Fundamental Disequilibrium(consumer tastes. Changes in Exchange Rates(devaluation of currency) 5.CAUSES OF DISEQUILIRIUM IN BALANCE OF PAYMENTS 1.) 3.. fall in foreign exchange reserves. Cyclical Fluctuations(depression or boom) 6. inflation. Changes in National Income(increase in GNP increases imports) 7. Temporary Disequilibrium(seasonal fluctuations) 2. short supply of capital. Capital movements(lending and borrowing) 9. Structural Disequilibrium(technological changes.) 4. import restrictions. Political conditions(political instability discourage foreign investors and hence outflow of capital) . Stage of economic development(LDC’s imports more) 8.

Expenditure Reducing policies. Adjustments through Exchange Depreciation. 5. Adjustment through Income changes.(reduction in public expenditure and money supply reduce demand for import goods) . 2.(Export promotion and Import Substitution) 6. 3. 4. Stimulation of Export and Import Substitutes. Direct controls(limiting imports) Adjustment through Capital movements.MEASURES TO CORRECT DEFICIT IN BALANCE OF PAYMENTS 1.