Balance of Payments

. The usual reporting period for all the statistics included in the accounts is a year.Meaning  The balance of payments is a statistical record of all the economic transactions between residents of the reporting country and residents of the rest of the world during a given time period.  The balance of payments of a country is a systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries.

firms and the public authorities.Domestic and foreign resident  It is important to note that citizenship and residency is not necessarily the same thing from the viewpoint of the balance-of-payments statistics. the subsidiaries of a multinational are treated as being resident in the country in which they are located even if their shares are actually owned by foreign residents. households. and there are some problems that arise with respect to the definition of a resident.  Multinational corporations are by definition resident in more than one country. .  The term residents comprise individuals.  For the purposes of balance-of-payments reporting.

for every transaction two entries must be made. the total of credits must exactly match the total of debits.Accounting Principles in Balance of Payments  The BOP is a standard double entry accounting record and as such is subject to all the rules of double entry book-keeping. one credit (+) and one debit (-) and leaving aside errors and omissions. that is. viz. . the balance of payments must always “balance”.

 The payments themselves. should be recorded as the offsetting debit entries. actual or prospective.Accounting principles  (a) All transactions. . which lead to an immediate or prospective payment from the rest of the world (ROW) to the country should be recorded as credit entries. all transactions which result in an actual or prospective payment from the country to the ROW should be recorded as debits and the corresponding payments as credits.  Conversely.

. is to be recorded as a credit entry. which results in an increase in the supply of foreign exchange.Accounting principles  (b) A transaction which results in an increase in demand for foreign exchange is to be recorded as a debit entry while a transaction.

Components of Balance of Payments  (a) The Current Account: Under this are included imports and exports of goods and services and unilateral transfers of goods and services.  (b) The Capital Account: Under this are grouped transactions leading to changes in foreign financial assets and liabilities of the country. .  (C) The Reserve Account-Increase or decrease in foreign exchange reserves maintained by the monetary authority of the country.

The Current Account  Merchandise: In principle.  . ie exports and imports. merchandise trade should cover all transactions relating to movable goods.

) Income  Investment income  Compensation to Employees . Transportation. Government.) Services =Travel.) Transfers: Official and Private (transfer of funds from abroad)  c. Insurance.Invisibles  Invisibles=a+b+c  a. and Miscellaneous.  b.

 The net balance is taken as deficit if negative (debits exceed credits).Current Account Balance  The net balance between the credit and debit entries under the heads merchandise. .  A surplus if positive (credits exceed debits). and invisibles taken together is the Current Account Balance.

The first relates to foreign equity investments in India either in the form of direct investments or FII’s. Disbursements received by Indian resident entities are credit items while repayments and loans made by Indians are debits.  The third group separates out the changes in foreign assets and liabilities of the banking sector ie change in reserves. and short-term credits such as trade related credits.Under this are included concessional loans received by the government or public sector bodies.  The next group is loans.The Capital Account  The capital account consists of three major subgroups. . long and medium-term borrowings from the commercial capital market in the form of loans. bond issues and so forth.

surveys of tourist numbers and expenditures. The authorities collect their information from the customs authorities. pension funds.Collection. services or of financial assets such as bonds. collecting statistics on every transaction between domestic and foreign residents is an impossible task. multinationals and investment houses. Information on government expenditures and receipts with foreign residents is obtained from local authorities and central government agencies . be they purchases or sales of goods. equities and banking transactions. and data on capital inflows and outflows is obtained from banks. Reporting and Presentation of the Balance-o£-Payments Statistics  The balance-of-payments statistics record all the transactions between domestic and foreign residents.  Reported figures are normally in the domestic currency of the reporting country.  Obviously.

unilaterally or in concert with its trading partners. BOP records all transactions that create demand for and supply of a currency.  BOP accounts are intimately connected with the overall saving- investment balance in a country’s national accounts.  They may confirm or indicate a reversal of perceived trends they may signal a policy shift on the part of the monetary authorities of the country. BOP deficits or surpluses may have an immediate impact on the exchange rate.  Countries suffering from chronic deficits may find their credit ratings being downgraded because the markets interpret the data as evidence that the country may have difficulties in servicing its debt.WHY ARE BOP STATISTICS IMPORTANT  In the short-run. . Continuing deficits or surpluses may lead to fiscal and monetary actions designed. Basically.  Movements in a country's reserves have implications for the stock of money and credit circulating in the economy.

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