Trade and Balance of Payment

Components of the trade

• Imports
-bulk imports: petroleum, crude & products,
bulk consumption goods, other bulk items.
-non bulk imports: capital goods, mainly export
related items
• Exports
-agriculture and allied products, ores and
minerals, manufactured goods, mineral fuels.
 Determinants of Exports

• External factors
– Rate of growth of the economies of importing
countries
– Rate of growth of world trade
– Rate of change in the price level in the importing
country
• Internal Factors
– Rate of growth of the Indian economy
– Rate of change in the domestic price level
• Exchange rate
 Determinants of Imports

• Rate of growth of the Indian economy

• Relative price of imports
Balance of Trade &Balance of Payments
BoT is a nation’s ratio of exports to imports.
A favorable balance (trade surplus) of trade exists when the
value of a nation’s exports exceeds its imports.
A trade deficit is when imports exceed exports

BoP
is the difference between money coming into a country
(from exports) and money leaving the country (for imports)
plus money flows from other factors such as tourism,
foreign aid, military expenditures, and foreign investment.
Balance of payments deficit or balance of payments surplus
 Definition

“The Balance Of Payments of a country is a systematic

record of all economic transactions between the
‘residents’ of a country and the rest of the world. It
presents a classified record of all receipts on account of
goods exported, services rendered and capital received
by ‘residents’ and payments made by them on account
of goods imported and services received from the capital
transferred to ‘non-residents’ or ‘foreigners’.” – Reserve
Bank of India (RBI)
• It is a statement of a country, which depicts the
transaction of that country with rest of the world during a
specified period of time..
• A record of the value of all transactions between
residents of a country with outsiders..
 BOP Surplus and Deficit

• In terms of the supply and demand of a nation’s

currency, there is:
– A balance of payments surplus if quantity
demanded for a currency exceeds quantity
supplied, putting upward pressure on the value
of the nation’s currency.
– A balance of payments deficit if quantity
supplied of a currency exceeds quantity
demanded, putting downward pressure on the
value of the nation’s currency.
 Purpose of BoP
1. Measures all financial and economic transactions over
a specified period of time.
2. Double-entry bookkeeping
a. Currency inflows = credits
earn foreign exchange
b. Currency outflows = debits
expend foreign exchange
3.Three Major Accounts:
a. Current
b. Capital
c. Official Reserves
 Importance of BoP
• The BoP is an important indicator of pressure on
a country’s foreign exchange rate .

• 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.
 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

• Current account
• Capital account
• Financial account
• Net errors and omissions account
• Reserves and related items: official reserve
account
 Current account
• Net export/import of goods (trade balance)
• Net export/import of services
• Net income (investment income from direct and
portfolio investment plus employee compensation)
• Net transfers (sums sent home by migrants and
permanent workers aboard, gifts, grants and
pensions)
It includes :
- Invisibles (non-merchandise trade)
- Merchandise trade
- Non monetary sale or purchase of gold
 Merchandise or Trade balance: (BoT)
GOODS
- Manufactured goods
- Semi-finished goods and components
- Energy products
- Raw Materials
- Consumer goods
(i) Durable goods
(ii) Non-durable goods
- Capital goods (e.g. new plant and equipment)
SERVICES
- Banking, insurance , legal and consultancy services
- Other financial services including foreign exchange and derivatives trading
- Tourism industry
- Transport and shipping
- Education and health services
- Services associated with research and development
- Cultural arts
UNILATERAL TRANSFERS
- Gifts
- government transfers to foreigners(E.g., Foreign aid or wheat from stockpiles)
- Private remittances of wages earned abroad
- interest payments, profits and dividends from external assets located outside the country.
 Capital account
• Capital transfers related to the purchase and sale of fixed
assets such as real estate
• It comprises long term and short-term inflow and out flow of
funds under the capital account receipts and payments

Foreign equity investment in India

-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
- 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
- transactions in currency, bank deposits, trade credits, etc
 • Financial account
- Net foreign direct investment
- Net portfolio investment
- Other financial items

• Net errors and omissions account

- Missing data such as illegal transfers

• Reserves and related items: official reserve

account
- Changes in official monetary reserves including gold,
foreign exchange, and IMF position.
 Countries with which India trade

• OECD • OPEC • Africa

- Iran -Benin
(1)European union
- Iraq -Egypt
-France - Indonesia
-Belgium -Kenya
- Saudi Arabia
-Germany -South Africa
- UAE
-UK  Eastern Europe
-Sudan
-Italy - Russia -Tanzania
-Netherlands  Developing countries -Zambia
(2) North America - China -USA
- Hong-Kong
-Canada
-USA
- South Korea • LAC
- Malaysia
(3) Other OECD - Singapore
-Australia - Thailand
-Japan - SAARC
-Switzerland - Africa
- others
 Global Competitiveness

Country Strengths
United States Technology,
R & D Spending
Univ. Enrollment, Efficient Legal
Finland System, Business Ethics
Cell-phone Ownership,
Tech. Innovation,
Taiwan
Local Firms Competitiveness
Singapore Savings Rate, Math/Science
Education, Political Trust
Sweden H.S. Enrollment, Press Freedom,
Phone Access
 References
• http://indiabudget.nic.in/
• http://www.eximbankindia.com/anr0910.pd
f
• http://rbi.org.in/scripts/PublicationsView.as
px?id=12304
• http://gcr.weforum.org/gcr2010/