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A PRESENTATION ON

BALANCE OF PAYMENT

MEANING
‡ BOP is a systematic record of all transactions during a given period of time between the residents of the country and of the foreign country. ‡ A country·s balance of payments accounts keep track of both its payments to and its receipts from foreigners.

Rules For BOP Accounting
‡ A transaction that leads to an actual or potential payment from residents of country to the rest of world (ROW) is to be recorded as debit, in that country·s BOP; transaction that leads to payment from ROW to residents is a credit entry. ‡ A transaction that increases the availability or reduces demand for foreign exchange is credit entry, a transaction that uses up foreign exchange is a debit entry.

Components of BOP
‡ The Current Account ‡ The Capital Account ‡ The Official Reserve Account

CURRENT ACCOUNT
It includes :  Merchandise trade  Invisibles (non-merchandise trade)  Non monetary sale or purchase of gold

‡ Merchandise trade includes import and export of tangible goods.

‡ Non- Merchandise Trade includes 
Trade In Service like travel and tourism and transport, engineering, consulting and other performed service.  Factor Income like payment and receipt of interest, dividend, and other income on previously made foreign investment.  Unilateral Transfer includes pension, remittance, gift, foreign aid, etc.

NonNon-monetary Sale Or Purchase Of Gold
‡ Monetary movement : sale or purchase of gold that influence international monetary reserves. ‡ Non-monetary is done for industrial purposes

Capital Account
‡ It comprises long term and short-term inflow and out flow of funds under the capital account receipts and payments Capital account consists of  Foreign equity investment in India  Loan  Other Investment

FOREIGN EQUITY INVESTMENT ‡ It includes: 
Direct investment: directly investing in India  Through port-folio: purchase of Indian companies· stock through foreign institutional investors or subscriptions by non-resident investors to GDR and ADR issues by Indian companies.

LOAN
It includes:  Concessional loans received by the government or public sector bodies.  Long and medium term borrowings from the commercial capital market in the form of loans, bonds  Short-term credit. Other investment includes transactions in currency, bank deposits, trade credits, etc.

Recoding In Capital Account
‡ Disbursement received by Indian entities are credit items ‡ Payments and loans made by Indians are debit items ‡ Change in foreign assets and liabilities of the banking sector [increase (decrease) in assetsdebit (credit), increase ( decrease) in liability ² credit (debit) ]

Official Reserve Account
‡ When a country must make a net payment to foreigners because of balance of payment deficit, the central bank of the country should run down official reserve. ‡ It consists of monetary gold, foreign exchange, SDR (special drawing rights) allocation by IMF and foreign currency. ‡ If the overall BOP is surplus, the surplus amount is added to the official reserve A/C. ‡ If the overall BOP is deficit, the official reserve A/c is debited with the deficit amount.

BOP AT A GLANCE
‡ Balance Of Trade= Export of goods-Import of goods. ‡ Balance Of Current A/C= Balance of trade + Net earnings on invisibles ‡ Balance Of Capital A/C= Foreign exchange inflow ² Foreign exchange outflow, on account of foreign investment, foreign loans, banking transactions and capital flows. ‡ Overall BOP = Balance of current A/c + Balance of capital A/c + Statistical Discrepancy

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