Balance of

Payments as a
Leading
Indicator
DR RUPAL CHOWDHARY
Balance of Payments

The Balance of Payments is the statistical record of a

country’s international transactions over a certain period of
time presented in the form of double-entry bookkeeping.
 The balance of payments accounts are those that record all
transactions between the residents of a country and residents
of all foreign nations.
 They are composed of the following:
 The Current Account
 The Capital Account
 The Official Reserves Account
 Statistical Discrepancy
The Current Account
Credit(Exports) (+) Debit(Imports) (-)
Goods Goods
Services Services
 Unilateral
Includes Transfers
all imports Unilateral
and exports of goods Transfers
and services.
 Includes unilateral transfers of foreign aid.
 If the debits exceed the credits, then a country is running a trade deficit.
(CAD)
 If the credits exceed the debits, then a country is running a trade surplus.
The Capital Account
Exports Imports
FDI FDI
Portfolio Investment ( FII, Portfolio Investment ( FII,
ADR, GDR) ADR, GDR)
NRI Deposits NRI Deposits

External Commercial External Commercial

Borrowings Borrowings

 The capital account measures the difference between Sales of assets to

foreigners and a country purchases of foreign assets.

 The capital account is composed of Foreign Direct Investment (FDI),

portfolio investments and other investments
The Official Reserves Account

 Official reserves assets include gold, foreign currencies,

SDRs, reserve positions in the IMF.
Is BOP always in equilibrium

 B= Rf- Pf
 B=Rf- Pf=0 - BOP equilibrium
 Rf-Pf >0 - BOP surplus
 Rf-Pf <0 - BOP deficit
Causes of Disequilibrium

 Changes in Exchange rates

 Cyclical Fluctuations
 Changes in National Income
 Price Changes
 Stages of Economic Development
 Political Conditions
Measures to Correct Deficit in
BOP
 Adjustment through exchange depreciation
 Devaluation
 Direct controls
 Adjustment through Capital Movements
 Adjustment through Income changes
 Stimulation of Exports and Import changes
 Expenditure Reducing policies
BOP as a leading indicator