Balance Of Payments

DEFINITION
The balance of payments of a country i s a
systematic record of all economi c transacti ons
between the residents of a country and the rest of
the world.
It presents a cl assified record of all receipts on
account of goods exported, services rendered, and
capi tal received by residents and payments made
by them on account of goods imported and
servi ces received and capital transferred to non-
residents or foreigners.
– Reserve Bank of India
 WHAT IS BOP
The balance of payments accounts are those that record all
transactions between the residents of a country and residents of all
foreign nations.

The BOP is determined by the country's exports and imports of

goods, services, and financial capital, as well as financial transfers.

It reflects all payments and liabilities to foreigners (debits) and all

payments and obligations received from foreigners (credits).

Balance of payments is one of the major indicators of a country's

status in international trade
 Importance & Purpose of BOP

• BOP records all the transactions that create demand for and supply of a currency.
This indicates demand-supply equation of the currency. This can drive changes in
exchange rate of the currency with other currencies.
• BOP may confirm trend in economy’s international trade and exchange rate of the
currency. This may also indicate change or reversal in the trend.
• This may indicate policy shift of the monetary authority (RBI) of the country
• Provides data for economic analysis
• Reveals changes in the composition & magnitude of foreign trade
• Provides indications of future repercussions of country’s past trade performances
• Reveals the weak and strong points of a country’s foreign trade relations
• The BoP is an important indicator of pressure on a country’s foreign exchange rate
and country's status in international trade.
• The BOP helps to forecast a country’s market potential, especially in the short run.
• Changes in a country’s BOP may signal the imposition or removal of controls over
payment of dividends and interest, license fees, royalty fees, or other cash
disbursements to foreign firms or investors.
 BoP terms
• Favorable Balance Of Payments – Value of total
receipts more than total payments
• Adverse Balance Of Payments – Value of total receipts
less than total payments
• Balanced Balance Of Payments – Value of total
receipts equals total payments
• Unrequited receipts – Receipts for which nothing has to
be paid in return.
• Unrequited payments – Payments for which nothing is
received in return.
 BOP A ccount s
CURRENT CAPITAL
ACCOUNT ACCOUNTS

Visible Short-term
items capital movement

Invisible items
Long-term
capital
movement
Interest
payments on
International Change in stock of
gold & Reserves of
Investments Foreign Exchange

SDRs, Net
Current errors &
transfers omissions

Current Account Surplus/Deficit Capital Account Surplus/Deficit

 Structure of Current A ccount
Transactions Credit Debit Net Balance
1. Merchandise Export Import -
2. Foreign Travel Earning Payment -
3. Transportation Earning Payment -
4. Insurance Receipt Payment -
(Premium)
5. Investment Dividend Dividend -
Income Receipt Payment
6.Government Receipt Payment -
(purchase of
goods & services)
CURRENT A/C - - Surplus (+)
Balance Deficit (-)
Official international reserves &
Net errors and omissions
• T h e o ff i c i a l i n t e r n a t i o n a l r e s e r v e a c c o u n t r e c o r d s
the change in stock of official international
reserve assets (also known as foreign exchange
reserves) at the country's monetary authority
• O ff i c i a l r e s e r v e s a s s e t s i n c l u d e g o l d r e s e r v e s ,
foreign currencies, SDRs, reserve positions in
the IMF
• Net errors & omissions exists to correct any
possible errors made in accounting for the other
accounts
• They are often referred to as "balancing items"
 S T R U C T U R E O F B A L A N C E O F PAY M E N T S
CREDITS
Current A/c:
• E x p o r t s o f g o o d s ( Vi s i b l e
items)
• Exports of services (Invisibles)
• Unrequited receipts(gifts ,
remittances, indemnities,
etc. form foreigners)
Capital A/c:
• Capital receipts (Borrowings
from abroad , capital
repayments by , or sale of
assets to foreigners, increase
in stock of gold and reserves
of foreign currency etc.)
To t a l Receipts
DEBITS
Current A/c:
• I m p o r t s o f g o o d s ( Vi s i b l e
items)
• Imports of services(Invisibles)
• Unrequited payments( gifts,
remittance, indemnities etc. to
foreigners)
Capital A/c:
• Capital payments (lending to ,
capital repayments to , or
purchase of assets from
foreigners, reduction in stock
of gold and reserves of
foreign currency etc.)
To t a l P a y m e n t s
 EQUILIBRIUM IN BOP
• Equilibrium
ACCOUNTS
Receipts from exports and the sale of
securities abroad equal payments for imports
and the purchase of securities from foreign
entities.

Transactions

Autonomous Induced
transactions transactions
Autonomous transactions
Current account: Export and import of goods and services
Capital account: Export and import of long-term capital are
autonomous transactions

Accommodating transactions
Current account: When export is not equal to import, short
run capital movements such as international borrowing and
lending take place, which are called induced or
accommodating transactions

Capital account: The short term capital movements viz. gold

movements and accommodating capital movements on
account of autonomous transactions are induced
transactions.
 Disequilibrium in BOP
 Whenever, debit & credit are not equal it causes an
imbalance in the balance of payment account. Such an
imbalance is called the DISEQUILIBRIUM.

• SURPLUS : When, • DEFICIT : When,

Total receipts> Total payments Total receipts< Total payments
“Favorable Balance” “Unfavorable Balance

• Caused on a temporary basis for a short

Short run period, say one year. Also be caused
Disequilibrium when a country's imports exceeds
exports in a particular year. 
• Persistent deficit or a surplus in the
Long run
balance of payments of a country. It is
Disequilibrium
also known as secular disequilibrium.
 Kinds of BOP Disequilibrium
Structural Disequilibrium: Due to structural changes in the economy
affecting demand and supply relations in commodity and factor market.
Persistent for longer period.

Cyclical Disequilibrium: Due to the changes in trade cycles, like

depression, prosperity, boom, recession, etc.,

Technological Disequilibrium: Due to various technological changes

involve inventions or innovations of new goods or new technique of
production, which affect demand.
Causes of BOP Disequilibrium
Population Growth

Development Programs

Natural Factors

Inflation

Globalization

Political Factor
 BOP Adjustments

• Monetary and fiscal tools:

– Prices
– Interest rates
– Income
– Money
– Export promotion
– Import substitution etc.
Source: RBI