The document provides information about a country's Balance of Payments (BOP), including: - BOP is a systematic record of all economic transactions between residents of a country and the rest of the world over a period of time. - The key components of BOP are the current account (covering trade in goods and services), capital account (covering movement of capital), and official reserves account. - Disequilibriums in BOP can be caused by economic, political, and social factors and governments use various monetary, trade, and other measures to correct BOP deficits.

1. Prepared by:
BINDU H A
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Balance of Payments

2. Balance of Payments
 Nations continually carry out economic, commercial and
financial transactions between residents of one nation and
rest of world in the form of import and export of goods and
services for money etc.
 A Balance of Payment is a systematic record of all economic
transactions between residents of a country and the rest of the
world carried out in a specific period of time.
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3. Features of Balance of Payments (BoP)
 It is a systematic record of all economic transactions between
residents of one country and rest of the world.
 It includes all transactions in goods (visible items), services
(invisible) and assets (flow of capital) during a period of time.
 It is constructed on double entry system of accounting. Thus,
every international transaction will result in credit entry and
debit entry of equal size.
 All economic transactions that are carried out with the rest of
world are either credited or debited.
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4. Components of Balance of Payment (BoP)
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5. A. Current Account
1. Merchandise trade: This account records imports and exports of physical
goods (visible items).
2. Invisible trade: Receipts and payments on invisibles i.e. services like
banking, insurance, travel, tourism, transportation etc.
3. Other Flows:
1. Investment income: Investment income includes any income made from
investing abroad, profits from business activities of subsidiaries located
abroad, interest received from investment and loans abroad, and
dividends from owing shares in overseas companies.
2. Unrequited flows (Unilateral transfers): This includes foreign aid,
gifts, grants, donations, charitable donations and international
remittances.
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6. Balance of Trade considers the value of exports and imports of visible items
i.e. merchandise only.
 It does not take into account trade of invisible items.
 Balance of Trade is a sub-set of Balance of Payment.
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7. B. Capital Account
1. Short term movement of capital: A short term capital is one
which matures in one year or less, such as bank accounts.
2. Long term movement of capital: A long term capital is one
whose maturity period is longer than a year, such as long term
bonds or physical capital.
a) Direct investment: It refers to expenditure on fixed capital
formation.
b) Portfolio investment: It refers to the acquisition of
financial assets like bonds, shares, etc
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8. C. Omissions and errors:
D. Official Reserves account:
 This account covers the net amount of transactions by gov-
ernment.
 This account covers purchases and sales of reserve assets (such as
gold, convertible foreign exchange and special drawing rights) by
the central monetary authority.
Balance of Payments = Current account balance + Capital account
balance + Reserve balance
i.e. (X – M) + (CI – CO) + FOREX
X is exports,
M is imports,
CI is capital inflows,
CO is capital outflows,
FOREX is foreign exchange reserve balance
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Credits Debits
Current Account Current Account
1. Merchandise Exports (Sale of Goods) 1. Merchandise Imports (purchase of
Goods)
2. Invisible Exports (Sale of Services) 2. Invisible Imports (Purchase of
Services)
a. Transport services sold abroad a. Transport services purchased
from abroad
b. Insurance services sold abroad b. Insurance services purchased
c. Foreign tourist expenditure in
country
c. Tourist expenditure abroad
d. Other services sold abroad d. Other services purchased from
abroad
e. Incomes received on loans and
investments abroad.
e. Income paid on loans and
investments in the home country.
3. Unilateral Transfers 3. Unilateral Transfers
a. Private remittances received from
abroad
a. Private remittances abroad
b. Pension payments received from
abroad
b. Pension payments abroad
c. Government grants received from
abroad
c. Government grants abroad.

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11. Equilibrium in Balance of Payment of Nations
• A country's balance of payments is said to be in equilibrium
when its autonomous receipts (credits) are equal to its
autonomous payments (debits).
• When a country's current account is at a deficit or surplus, its
balance of payments (BOP) is said to be in disequilibrium.
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Disequilibrium in BOP is caused by :
 Economic factors
 Political factors and
 Sociological factors.

12. 1) Development Disequilibrium
2) Cyclical Disequilibrium
3) Secular disequilibrium and
4) Structural Disequilibrium
1. Development Disequilibrium
• Developing countries mostly take up activities like establishment of
industries, infrastructure etc. which require greater imports of capital
goods, machinery etc.
• It also shoots up imports of consumer goods on account of increase in
per capita income and aggregate demands.
• Thus increased developmental activities result in greater
outflow of foreign currency leading to deficit in BOP.
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Economic Factors

13. 2. Cyclical Disequilibrium
Due to fluctuations in business cycle in a country , value of imports of
consumer goods go up or down periodically, both of which lead to
disequilibrium in BOP.
3. Secular Disequilibrium
• It mostly happens in developed countries where disposable income of
people are very high.
• It raises in turn the cost of production and price of goods and services.
• Consequently, developed countries prefer to outsource goods and
services from other countries where quality of goods is high and cost
of production is low.
• It may lead to secular disequilibrium in BOP of nation.
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14. 4. Structural Disequilibrium
• Sometimes notable shift comes in nature of economy of
countries e.g. from agricultural to manufacturing or
services.
• These may call for structural changes in developing
alternative items, sources of supply, changes in transport
channels and also costs.
• These structural changes may enhance imports of capital
goods and consumer goods resulting in deficits in BOP.
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15. Political uncertainties, instability, internal disturbances, external
wars etc. create threatening situation for local industry and
investments. In such cases domestic production declines leading
to increase in imports and outflow of capital. It results in deficit
in BOP
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Political Factors
Changes in culture, taste, preference, fashion etc. bring about
changes in nature of import of consumer items first, followed
by capital goods leading to deficit in BOP.
Social Factors

16. • When BOP becomes surplus, nations enjoy the same as it
offers a number of desirable situation like
 Increased purchasing power and
 Influence in global market.
• In cases of disequilibrium due to deficit, countries adopt
measures to eliminate the same completely, if not possible at
least reduce it.
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Correction of BOP Disequilibrium

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1. Automatic Correction of BOP Disequilibrium
 Deficit in BOP indicates that demand for foreign exchange is
higher than its supply in the nation.
 It leads to devaluation of local currency in relation to the
foreign currency.
 Imports become costlier and exports cheaper. So imports get
reduced and exports are increased.
 Outflow of FE is reduced and income is increased leading to
automatic restoration of equilibrium.

18. Govt. also adopts certain measures to control deficit BOP
called Deliberate Measures.
A. Monetary Measures
B. Trade Measures
C. Miscellaneous Measures
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2. Deliberate Measures

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Reduction in Money Supply
RBI takes to control credit so that money supply in the country is
reduced which leads to decline in income, purchasing power,
aggregate demand and consumption. Thus imports decline and
hence outflow of foreign currency. In turn exports grow and
inflow of foreign currency to set right BOP disequilibrium.
 Reducing inflation
Inflation (continuous rise in prices) discourages exports and
encourages imports. Therefore, government should check
inflation and lower the prices in the country.
A. Monetary Measures

20.  Devaluation
In case of deficit BOP, purchasing power of local currency
reduces, the Govt. deliberately devalues currency. Thus imports
become costlier and exports cheaper. Hence increased exports and
reduced imports balance the disequilibrium of BOP.
 Exchange Control
Exporters are to surrender the foreign exchange earned to
RBI through authorized dealers and importers are to draw foreign
exchange from authorized dealers. Through suitable policies from
time to time, Govt. of India and RBI control imports to reduce
deficit of BOP.
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21. These measures try to restore equilibrium through
increasing exports and/or reducing imports.
 Export Promotion Measures
Govt. of India attempt to boost exports by reducing
export duties, providing incentives, encouraging EOUs,
forming EPZs, FTZs etc.
 Import Control Measures
Import control measures include ways and means of
restricting imports through duties, quotas, licenses etc.
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B. Trade Measures

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Govt. of India tries to remove BOP disequilibrium by
assortment of means like
a) Attracting Foreign Investments both FDI and FPI
b) Attracting NRI deposits
c) Promoting tourism
d) Negotiating Foreign currency loans etc.
C. Miscellaneous Measures

23.  BOP statistics are published quarterly by RBI in India.
 These are analyzed by bankers, businessmen, economists foreign
exchange traders etc. to know international economic
performance of the country.
 Current account deficit (CAD) arises when a country’s total
imports of goods, services and transfers is greater than exports.
 India current account posted a 0.6 billion USD surplus in the
first quarter of 2020, compared to a USD 4.6 billion deficit a year
earlier.
 It is the first current account surplus since the first quarter of
2009.
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24. India’s Current account (2019-20)
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( in million USD)

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