BOP TRENDS

IN INDIA
NAME OF THE
FACULTY:
Ms. N, RADHIKA
 The balance of payments is the record of
all international trade and financial
transactions made by a country's
residents. 
The balance of payments (BOP) is a statement
of all transactions made between entities in one
country and the rest of the world over a defined
period of time, such as a quarter or a year.
 Balance of Payments is a very important record
of financial transactions and status of any
nation and its economy. It highlights the
direction of economic growth or otherwise of
any country and is a ground on which
many important policy decisions are based.
 The balance of payments tracks international
transactions. When funds go into a country, a
credit is added to the balance of
payments (“BOP”). When funds leave a
country, a deduction is made. For example,
when a country exports 20 shiny red
convertibles to another country, a credit is
made in the balance of payments.
 The BOP is divided into three main categories:
the current account, the capital account, and
the financial account. Within these three
categories are sub-divisions, each of which
accounts for a different type of international
monetary transaction.
 Current Account
 The current account measures a country's trade
balance plus the effects of net income and direct
payments. When the activities of a country's
people provide enough income and savings to
fund all their purchases, business activity, and
government infrastructure spending, then the
current account is in balance.
 Capital Account
 The capital account measures financial
transactions that don't affect a country's
income, production, or savings. For example, it
records international transfers of drilling
rights, trademarks, and copyrights. Many
capital account transactions rarely happen,
such as cross-border insurance payments. The
capital account is the smallest component of the
balance of payments.
 Financial Account
 The financial account measures changes in domestic
ownership of foreign assets and foreign ownership of
domestic assets. If foreign ownership increases more
than domestic ownership does, it creates a deficit in the
financial account. This increase means the country is
selling its assets, like gold, commodities, and corporate
stocks, faster than the nation is acquiring foreign
assets.
 Calculation of balance of
payments
 It is the sum of the balance of
trade (net earnings on exports
minus payments for imports),
factor income (earnings on
foreign investments
minus payments made to foreign
investors) and unilateral
transfers
Key term Definition

a record of all funds going in and

balance of payments
out of a country

a record of international
current account (CA) transactions that do not create
liabilities

a record of international
transactions that do create
liabilities; the capital and financial
capital financial account (CFA)
account includes official and
private sales and purchases of
 the net of payments
received and payments
made on investments
overseas; for example, if
an American resident
factor income
owns stock in a Japanese
car company, any income
earned on that stock is
factor income in the U.S.
current account.
money that is received from
another country that is not
in exchange for a good,
service, or financial asset;
remittances
for example, when someone
is working abroad and
sends money home to their
family, that is a remittance.
 The current account (CA) and capital and
financial account (CFA) records transfers and
purchases between countries
 The balance of payments is a system of
recording transactions that happen between
countries. Any movement of money into, or out
of, a country has to be accounted for. We can
use this flowchart to figure out where a
transaction should go:
 There are two categories in the BOP:
the current account (CA) and the capital and
financial account (CFA). If a transaction
creates a liability, like selling a bond to another
country, that gets counted in the capital and
financial account. But if a transaction doesn’t
create a liability (like the fancy red cars), the
transaction gets counted in the current account.
 CA=-CFA
 The current account represents a country's net
income over a period of time, while the capital
account records the net change of assets and
liabilities during a particular year. ... The sum
of the current account and capital
account reflected in the balance of payments
will always be zero.
 Trade deficits and surpluses in the balance of
payments
 A trade surplus exists if a country exports more
than it imports. A trade deficit exists if a
country exports less than it imports.
 The key point to note about the balance of
payments is that they always balance.
Whenever a country runs a current account
deficit it does so by accumulating financial
liabilities, or drawing down its own assets
 Key equation: The balance of payments
 The current account (CA)(CA)left parenthesis, C, A,
right parenthesis and the capital and financial
account (CFA)(CFA)left parenthesis, C, F, A, right
parenthesis must sum to zero.
 CA+CFA=0CA+CFA=0C, A, plus, C, F, A, equals, 0
 Note that this equation can be rearranged to read
 CA=-CFA
 A country’s BOP is vital for the following reasons:
 BOP of a country reveals its financial and
economic status.
 BOP statement can be used as an indicator to
determine whether the country’s currency value is
appreciating or depreciating.
 BOP statement helps the Government to decide on
fiscal and trade policies.
 It provides important information to analyze and
understand the economic dealings of a country
with other countries.
 Common misperceptions
 In the concept of balance of payments sometimes we
get confused about the “money” that is moving
around in the capital and financial account.
Changes in the capital and financial account impact
the market for loanable funds, not the money
market. When a country sends its financial assets to
another country, it is really sending its savings.
Recall that the supply of loanable funds is the sum
of private savings, public savings, and net capital
inflows. The capital and financial account tells you
how much net capital inflow (or outflow) there is.
 The capital that is being sent to and
from countries in the capital and
financial account is financial capital, not
physical capital. Whenever you use the
word capital, it’s good practice to
specify the kind of capital you are
talking about. If you are talking about
the stock of physical equipment that can
lead to economic growth, say “physical
capital.” If you are talking about the
flow of financial assets between
countries, say “financial capital.”
 Many people assume that a trade deficit is
bad. CA deficits aren’t necessarily bad because
a country can consume more goods than they
could produce domestically. However, deficits
do create a future liability that will eventually
need to be paid.
 Problems of balance of payment
 Balance of payments difficulties may develop
slowly over time and can result from
developments such as a progressive loss of key
export markets, high and rising import
dependency, declining capital inflows, rising
foreign debt, unsustainable current account
deficits, sustained currency overvaluation and
banking sector .
 Difference between balance of trade and
balance of payments
 The key difference between Balance of Trade
and Balance of Payments lies in the fact
that balance of trade records a country's
imports and exports of goods over the world
while the balance of payment records all the
transactions of a country's economy with other
countries.
 The purpose of incorporating this item in
the BOP account is to adjust the difference
between the sums of the credit and the sums of
the debit items in the BOP accounts so that they
add up to zero by construction. Hence the
proposition 'the BOP always balances'.
 The balance of payment is always balanced
 The following are the
important causes producing disequilibrium in
the balance of payments of a country:
 Trade Cycles: ...
 Huge Developmental and Investment
Programmes: ...
 Changing Export Demand: ...
 Population Growth: ...
 Huge External Borrowings: ...
 Inflation: ...
 Demonstration Effect: ...
 Reciprocal Demands
 A good trade balance
 If imports are greater than exports, it is
sometimes called an
unfavourable balance of trade. If exports
exceed imports, it is sometimes called a
favourable balance of trade. Includes all those
visible and invisible items exported from and
imported into the country in addition to exports
and imports of merchandise.
 FAVORABLE BALANCE OF PAYMENTS:
An imbalance in a nation's balance of
payments in which payments made by the
country are less than payments received by the
country. This is also termed a balance of
payments surplus. It's
considered favorable because more currency is
flowing into the country than is flowing out.