BALANCE OF
PAYMENTS
MEANING AND DEFINITION
It Is A Systematic Record Of The Economic Transactions Of A Country
With The Outside World In A Given Year
BO SODERSTERN “ The Balance Of Payments is merely a way of listing
receipts and payments of in international transactions for a country”
B J COHEN “ Balance Of Payments shows the country’s trading position,
changes in its net position as foreign lender or borrower, and changes in its
official reserve holdongs”
PRINCIPLES OF BOP ACCOUNT
• Double Entry System Of Book Keeping
• Horizontal Or Vertical Preparation
• Usually Meant For A Year But Some Countries Prepare It
Twice Or As Many As 4 Times In A Year.
STRUCTURE OF BOP
CREDIT DEBIT
1. CURRENT ACCOUNT
EXPORTS: (a) Goods IMPORTS: (a) Goods
(b) Services (b) Services
( c ) Transfer Of Payments ( c ) Transfer Of Payments
2. CAPITAL ACCOUNT
(a) Borrowings from other countries (a) Lending to foreign Countries
(b) Direct Investment by foreign Countries (b) Direct Investment in foreign Countries
3. OFFICIAL SETTLEMENTS ACCOUNTS
(a) Gold, Foreign Currencies and SDRs (a) Gold, Foreign Currencies and SDRs
4. ERRORS AND OMISSIONS
CURRENT ACCOUNT
• BALANCE OF TRADE ( Visible Trade)
• GOODS –
• General Merchandise
• Goods for Processing
• Repairs on goods
• Goods procured in ports
• Non monetary gold
CURRENT ACCOUNT – SERVICES
Transportation Information
Travel Royalties
Communication Other business services
Construction Personal, recreational
and cultural services
Insurance Government services
Financial
TRANSFER PAYMENTS
• FLOW OF FUNDS BETWEEN GOVERNMENTS
• REMITTANCES
CAPITAL ACCOUNT
• ACQUISITION OF FIXED ASSETS
• TRANSFER OF FUNDS TO ACQUIRE FIXED ASSETS
• ACQUISITION OF NON- FINANCIAL ASSETS
• DIRECT INVESTMENT – INVESTING IN EQUITIES AND DEBENTURES
• PORTFOLIO INVESTMENT - EQUITIES, DEBENTURES, FUTURES,
OPTIONS ETC.
• OTHER INVESTMENT – TRADE CREDIT, LOANS
ISSUES RELATED TO BOP
• Capital account convertability
• Current account convertability
• India s BOP crises in 1991
USES OF BOP ANALYSIS
• OVERVIEW OF MONETARY AND MACRO ECONOMIC SITUATIONS OF THE
COUNTRY
• STUDIES THE PROSPECTS OF DIRECT INVESTMENT TO THE COUNTRY
• REVEALS THE IMPLICATIONS OF EXCHANGE RATE OF THE ECONOMY
• PROVIDES DATA FOR ECONOMIC ANALYSIS
• REVEALS CHANGES IN THE COMPOSITION AND MAGNITUDE OF
INTERNATIONAL TRADE
• PROVIDES INDICATIONS OF FUTURE REPURCUSSIONS ON THE BASIS OF
COUNTRY’S PAST PERFORMANCES
EQUILIBRIUM AND DISEQUILIBRIUM IN BOP
• EQUILIBRIUM IN BOP
• DISEQUILIBRIUM IN BOP
• SURPLUS
• DEFICIT
CAUSES FOR DISEQUILIBRIUM IN BOP
• TEMPORARY CHANGES
• RANDOM VARIATIONS IN TRADE
• SEASONAL FLUCTUATIONS
• FUNDAMENTAL DISEQUILIBRIUM
• CHANGES IN CONSUMERS TASTES AND PREFERENCES ( DOMESTIC AND FOREIGN)
• CONTINUOUS FALL IN FE RESERVES DUE TO INELASTIS SUPPLY OF EXPORTS AND HIGH
DEMAND FOR IMPORTS
• EXCESSIVE CAPITAL OUTFLOWS
• LOW COMPETITIVE STRENGTH
• INFLATIONARY PRESSURES
CAUSES ( CONTD)
STRUCTURAL DISEQUILIBRIUM
• TECHNICAL CHANGES IN COP LEADING TO HIGH COSTS
• IMPORT RESTRICTIONS
• DEFICIENCY OF RESOURCES
• DIRECTION OF CAPITAL FLOWS
• CHANGES IN EXCHANGES RATES
• OVER VALUATION
• UNDERVALUATION
CAUSES (CONTD)
• CYCLICAL DISEQUILIBRIUM
• PHASES OF BUSINESS CYCLE – BOOM, RECESSION, RECOVERY, DEPRESSION
• CHANGES IN NATIONAL INCOME
• PRICE CHANGES
• INFLATION
• DEFLATION
• STAGES OF ECONOMIC DEVELOPMENT
• DEVELOPING
• DEVELOPED
CAUSES ( CONT)
• CAPITAL MOVEMENTS
• LENDING / BORROWINGS
• EXPORTS / IMPORTS
• POLITICAL CONDITIONS
• POLITICAL INSTABILITY
MEASURES TO CORRECT DEFICIT IN BOP
• ADJUSTMENT THROUGH EXCHANGE DEPRECIATION
• THROUGH MARKET FORCES OF DEMAND SUPPLY
• DEVALUATION
• EXPENDITURE SWITCHING POLICY
• THROUGH GOVERNMENT INTERVENTION
MEASURES TO CORRECT DEFICIT IN BOP
• DIRECT CONTROLS
• IMPORT DUTIES
• QUOTAS
• EXCHANGE CONTROL
• ADJUSTMENT THROUGH CAPITAL MOVEMENTS
• ENCOURAGE CAPITAL INFLOWS
• FAVOURABEL INTEREST RATES
• ADJUSTMENT THROUGH INCOME CHANGES
MEASURES ( CONT)
• STIMULATION OF EXPORTS
• INCREASE PRODUCTION
• ENHANCE PRODUCTIVITY
• BETTER MARKETING
• IMPORT SUBSTITUTION
• EXPENDITURE REDUCING POLICIES
• TIGHT MONETARY POLICY
• CONTRACTIONARY FISCAL POLICY
THANK YOU
