BOP

Meaning: An accounting statement that provides a systematic record of all the economic
transactions between the residents of a country and the residents of foreign countries during a
given period of time.
Residents of a country include individuals, firms, government agencies.
Resident carries out basic economic activities of earnings, spending and accumulation from that
location.
They do not include foreign tourists and visitors, foreign staff of embassies, diplomatic staff,
migratory workers even though they work and operate within the domestic teritory of the country.

BOT
Difference between the value of exports and the value of imports during the period of one year.
Balance on BOT can be:
a) Surplus[+]- Favourable
b) Deficit[-]-Unfavourable
 BOP
CLASSIFICATION OF ECONOMIC TRANSACTIONS
A) EXPORT AND IMPORT OF GOODS[VISIBLE ITEMS OF TRADE/MERCHANDISE
TRANSACTIONS]- BOT
B) EXPORT AND IMPORT OF SERVICES [INVISIBLE ITEMS]
C) UNILATERAL TRANSFERS –PRIVATE [sending gifts abroad, scholarships] OR
GOVERNMENT[grants and aid]
D) CAPITAL TRANSFERS-Relates to capital receipts and payments. Includes
borrowing, capital repayments, sale of assets, changes in stock of gold and
reserves of forex.
Relates to movement of long term and short term capital between nations.
 CHARACTERISTICS OF BOP
A) SYSTEMATIC RECORD
B) FIXED PERIOD OF TIME
C) DOUBLE ENTRY SYSTEM
D) SCOPE

BOP HAS 2 SIDES:

I) CREDIT SIDE: ALL INFLOWS OR SOURCES OF FOREIGN EXCHANGE .
II) DEBIT SIDE: ALL OUTFLOWS OR USES OF FOREIGN EXCHANGE.

BALANCE IN BOP: Debit=Credit-WHEN RECEIPTS OF FOREIGN EXCHANGE ARE EQUAL TO

PAYMENTS OF FOREIGN EXCHANGE.
DEFICIT IN BOP: D>C
SURPLUS IN BOP: D<C
 COMPONENTS/STRUCTURE OF
BOP
CURRENT ACCOUNT
WHICH RECORDS ALL TRANSACTIONS RELATING TO EXPORT AND IMPORT OF
GOODS AND SERVICES AND UNILATERAL TRANSFERS DURING A GIVEN PERIOD OF
TIME.
A) EXPORT AND IMPORT OF GOODS: PAYMENT FOR IMPORT OF GOODS[DEBIT
ITEMS] AND RECEIPT FROM EXPORTS[CREDIT]
BALANCE OF THESE VISIBLE EXPORTS AND IMPORTS IS BOT [OR] TRADE BALANCE.

B) EXPORT AND IMPORT OF SERVICES: NON FACTOR SERVICES[BANKING, SHIPPING,

INSURANCE]
SOLD AND PURCHASED BY THE RESIDENTS OF A COUNTRY, TO AND FROM ROW.
PAYMENTS ARE EITHER RECEIVED OR MADE TO THE OTHER COUNTRIES FOR THE
USE OF THESE SERVICES.
BALANCE ON CURRENT ACCOUNT
The net value of credit[ export of goods, export of services, unilateral transfers, income
receipts] and debit balances[import of goods, import of services, transfer payment,
income payment] is the balance on current account.
SURPLUS IN CURRENT ACCOUNT
Credit > Debit-Net inflow of forex. CAS Arises when the value of exports of goods and
services is more than the value of imports of goods and services. CAS signifies the
nation is a lender to the ROW.

DEFICIT IN CURRENT ACCOUNT

Credit < Debit- Net Outflow of forex. CAD Arises when the value of exports of goods
and services is less than the value of imports of goods and services. CAS signifies the
nation is a borrower from the ROW.
 BOP- CAPITAL ACCOUNT
1. RECORDS ALL THOSE TRANSACTIONS BETWEEN THE RESIDENTS OF A COUNTRY AND ROW.
2. IT CAUSE A CHANGE IN THE ASSETS OR LIABILITIES OF THE RESIDENTS OF THE COUNTRY OR ITS
GOVERNMENT.
3. CAPITAL ACCOUNT IS CONCERNED WITH FINANCIAL TRANSFERS, SO IT DOESNOT HAVE DIRECT EFFECT
ON INCOME, OUTPUT AND EMPLOYMENT OF THE COUNTRY.
4. COMPONENTS ARE:
A) BORROWING AND LENDING TO AND FROM ABROAD:
ALL TRANSACTIONS RELATING TO BORROWINGS FROM ABROAD BY PRIVATE SECTOR, GOVERNMENT ETC..
RECEIPTS OF SUCH LOANS AND REPAYMENT OF LOANS BY FOREIGNERS ARE RECORDED ON THE POSITIVE
OR CREDIT.
ALL TRANSACTIONS OF LENDING TO ABROAD BY THE PRIVATE AND GOVERNMENT. LENDING ABROAD AND
REPAYMENT OF LOANS TO ABROAD IS RECORDED AS NEGATIVE OR DEBIT.
B) INVESTMENTS TO AND FROM ABROAD: INVESTMENTS BY ROW IN SHARES OF INDIAN COMPANIES,
REAL ESTATE IN INDIA- INVESTMENTS FROM ABROAD ARE RECORDED ON THE CREDIT SIDE AS THEY
BRING FOREIGN EXCHANGE.
INVESTMENTS BY INDIAN RESIDENTS IN SHARES OF FOREIGN COMPANIES, REAL ESTATES ABROAD. SUCH
INVESTMENTS TO ABROAD ARE RECORDED ON DEBIT SIDE AS THEY LEAD TO OUTFLOW OF FOREIGN
EXCHANGE.
i) Foreign Investment: This refers to investment to and from the ROW. Investment may be Direct
or portfolio.
a) DIRECT INVESTMENT: Direct investment abroad means purchasing a real/physical asset in other
country and at the same time acquiring control of it. Example: purchase of a land , building.
b) PORTFOLIO INVESTMENT: A form of investment under which a firm/company of a country
purchases shares of a foreign company or buys bonds issued by foreign governments. Under this
form of investment, firm does not have control over the asset. If US decides to buy UK bonds-
inflow into UK.
ii) Private Transactions: Any transactions from the domestic country or ROW by individuals,
businesses, other non-government entities etc.
iii) Official Transactions: It refers to credit granted by foreign governments and international
institutions like IMF to Central and State Governments.

IV) Banking Capital: It refers to foreign assets and foreign liabilities of banking sector – commercial
banks and co-operative banks as dealers of foreign exchange. Owing to drawdown of foreign
assets of the commercial banks, banking capital inflow into the domestic economy tends to rise.
 OFFICIAL RESERVE TRANSACTIONS

A sub division of capital account, is the foreign currency and securities held by the government, usually by its
Central Bank and is used to balance the payments from year to year.

TRANSACTIONS THAT CAUSE CHANGES IN THE OFFICIAL RESERVES OF THE CENTRAL BANK.
WHEN CURRENT ACCOUNT BALANCE AND CAPITAL ACCOUNT BALANCE[ BORROWINGS FROM ABROAD,
INVESTMENTS FROM ABROAD] IS NOT EQUAL TO ZERO, THERE IS MOVEMENT OF OFFICIAL RESERVES OF THE
CENTRAL BANK.

WHEN CURRENT ACCOUNT BALANCE AND CAPITAL ACCOUNT BALANCE IS EQUAL TO ZERO, THERE IS NO
MOVEMENT OF OFFICIAL RESERVES OF THE CENTRAL BANK.-EQUILIBRIUM IN BOP

ACCOMODATING ITEMS[BELOW THE LINE ITEMS], FREE FROM CONSIDERATION OF PROFIT] IN THE BOP RELATE TO
ONLY THE MOVEMENT OF OFFICIAL RESERVES WITH A VIEW TO CORRECTING BOP IMBALANCE.

THUS OFFICIAL RESERVES ARE REDUCED WHEN THERE IS BOP DEFICIT AND INCREASED WHEN THERE IS BOP
SURPLUS.
ELIMINATE THE SITUATION OF SURPLUS OR DEFICIT IN BOP.
AUTONOMOUS AND ACCOMODATING ITEMS
AUTONOMOUS TRANSACTIONS ARE THOSE ECONOMIC TRANSACTIONS WHICH TAKE
PLACE DUE TO SOME ECONOMIC MOTIVE SUCH AS PROFIT MAXIMISATION.
KNOWN AS ABOVE THE LINE ITEMS-RECORDED AS FIRST ITEMS BEFORE CALCULATING
SURPLUS OR DEFICIT IN BOP.
SUCH TRANSACTIONS TAKE PLACE IN BOTH CURRENT AND CAPITAL ACCOUNT.
EXAMPLE: EXPORT OF TEA TO ENGLAND, IMPORT OF CRUDE OIL
TAKE PLACE BOTH ON CURRENT ACCOUNT AND CAPITAL ACCOUNT OF BOP.

ACCOMODATING TRANSACTIONS ARE THOSE UNDERTAKEN TO COVER DEFICIT OR SURPLUS

IN AUTONOMOUS TRANSACTIONS.
BELOW THE LINE ITEMS-RECORDED AS SECOND ITEMS AFTER CALCULATING SURPLUS OR
DEFICIT.
EXAMPLE: LOAN TAKEN BY INDIA FROM IMF TO COVER BOP DEFICIT.
TAKE PLACE ONLY ON THE CAPITAL ACCOUNT AFTER CALCULATING THE OVERALL DEFICIT OR
SURPLUS IN BOP.
 REASONS FOR DISEQUILIBRIUM
IN BOP
1. POLITICAL FACTORS- POLITICAL INSTABILITY , WAR
2. ECONOMICS FACTORS- INFLATION, HIGH TRADING COSTS
3. SOCIAL FACTORS- DEMONSTRATION EFFECT, CROSS- BORDER PREJUDICE

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 QUESTIONS FER AND BOP

1. WHY DOES THE DEMAND FOR FOREIGN CURRENCY FALL AND SUPPLY RISES WHEN ITS
PRICE RISES? EXPLAIN [4]
2. WHAT IS DIRTY FLOATING? [1]
3. EXPLAIN THE EFFECT OF DEPRECIATION OF DOMESTIC CURRENCY ON EXPORTD AND
IMPORTS.[3]
4. I) IN WHICH SUB-ACCOUNT AND ON WHICH SIDE OF BOP ACCOUNT WILL FOREIGN
INVESTMENTS IN INDIA BE RECORDED? GIVE REASONS.[3]
ANS: CAPITAL ACCOUNT OF BOP AS IT IMPACTS CHANGE IN THE OWNERSHIP OF ASSETS.
RECORDED ON THE CREDIT SIDE IN THE BOP ACCOUNT - AS IT LEADS TO THE RECEIPTS OF
FOREIGN EXCHANGE FROM ROW.
II) WHAT WILL BE THE EFFECT OF FOREIGN INVESTMENTS IN INDIA ON EXCHANGE RATE?
EXPLAIN.
SUPPLY OF FOREIGN CURRENCY INCREASES- SUPPLY SHIFTS RIGHT-CAUSES FALL IN
EQUILIBRIUM EXCHANGE RATE –CAUSES APPRECIATION OF DOMESTIC CURRENCY.
5. INDIAN INVESTORS LEND ABROAD. ANSWER THE FOLLOWING QUESTIONS:
I) IN WHICH SUB ACCOUNT AND ON WHICH SIDE OF THE BOP ACCOUNT SUCH LENDING IS
RECORDED?
ANS: CAPITAL ACCOUNT-RECORDED ON THE DEBIT SIDE OF THE BOP ACCOUNT-LEADS TO THE
PAYMENT OF FOREIGN EXCHANGE TO THE ROW.
II) EXPLAIN THE IMPACT OF THIS LENDING ON MARKET EXCHANGE RATE.
DEMAND FOR FOREIGN CURRENCY INCREASES- DEMAND CURVE SHIFTS RIGHT-CAUSES RISE
IN EQUILIBRIUM EXCHANGE RATE-SITUATION OF DEPRECIATION OF THE DOMESTIC CURRENCY.
6. WHERE WILL SALE OF MACHINERY TO ABROAD BE RECORDED IN THE BOP ACCOUNTS? GIVE
REASONS.[3]
7. IF BOT IS SHOWING A DEFICIT OF ₹ 10,000 AND THE VALUE OF EXPORTS IS ₹ 15,000. FIND
THE VALUE OF IMPORTS. [1]
8. TEN US DOLLARS ARE EXCHANGED FOR FIVE HUNDRED INDIAN RUPEES. WHAT IS THE
EXCHANGE FOR INDIAN CURRENCY? [1]
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