balance of payment

1. Presentation on
BALANCE OF PAYMENT

2. “ The balance of payments of a country is a systematic accounting of a all economic
transactions between the residents of the reporting country and residents of foreign
countries during a given period of time.”
Nature of Balance of Payments :-
• It is a record of economic transactions.
• Only the net balance is shown
• It include all transactions, visible as well as invisible.
• It relates to a period of time Generally, it is an annual statement.
• It adopts a double entry book-keeping system. It has two sides: credit
side and debit side. Receipts are recorded on the credit side and
payments on debit side.
Balance of Payment (BOP)

3. Purpose of BOP
• To find the impact of the monetary inflows and outflows of economy.
• To tide over the crisis India have to borrow heavily from foreigners or abroad
• To find out whether the economic condition of a country in relation to the world
economy is improving or deteriorating.
• BOP reveals the changes in the composition and magnitude of foreign trade
• BOP reveals the weak and strong points in the country’s foreign trade relations and
there by invites Govt. attention to the need for corrective measure against the weak
spots and unhealthy development.
• It also provide indications of future repercussion's of country’s past trade
performances.

4. Credit transactions
Transactionsthatinvolvethereceiptpaymentsfromforeigners.(+)
Eg:-Exportsofgoodsandservice,Unilateraltransfersreceivedfromforeigners
Debit transactions
Transactions that involve making of payments to foreigners(-)
Eg:-the importation of goods and service , unilateral transfers to
foreigners

5. Capitalinflow
-an Increase in foreign assets in the nation
-a reduction in a nations assets held abroad
Capital outflow
-an increase in nations assets in abroad.
-a reduction of foreign asset in the nation.

6. .
Action : U.S export $500 or merchandise to be paid for 3 months
Action: The U.S Govt. gives U.S bank balance of $100 to developing nation
Name of A/C Cr.(+) Dr.(-)
Goods export +500
Capital out flow
-500
Name of A/C Cr.(+) Dr.(-)
Unilateral transfer -100
Capital Inflow +100

7. Current Transactions
 The Current account of a country consists of all transactions
related to trade in goods and services and unilateral transfers.
Transaction that affect the current level of income
Based on the consumption of the country during the current year
Eg: Exports and imports of goods and services , Unrequired receipts
and payments such as foreign aid , gift, donation etc.
Flow transactions

8. Balance of Trade
• The net balance of merchandise trade that is the excess of exports over imports is called BOT.
• If E>M if shows a surplus trade balance
• If E<M if shows a deficit trade balance.
BOP: Current account
Transactions Credit Debit Net Balance
Merchandise
Foreign travel
Transportation
Insurance
Investment Income
Govt.
Miscellaneous
Export
Earnings
Earnings
Receipts
Dividend
Receipts
Receipts
Import
Payments
Payments
Payments
Dividend
Payments
payments
-
-
-
-
-
-
-
Current A/C balance - - Surplus(+)
Deficit(-)

9. Transactionsthatresultininflowsandoutflowsofcapital
itincludes
1) foreigninvestment
2)foreignborrowingsandlending's
3)bankingtransactions
capitaltransactionschangethestockofthecapitalofthecountry
Capitaltransactionshave longtermrepercussions
settlementisspreadoveralongperiodoftime.
Stocktransactions
Capital transactions

10. Short term capital transactions
• Sale and purchases of short term securities such as treasury bills , commercial bills
and acceptance bills speculative purchase of foreign currency cash balance held by
foreigners.
Long term capital transactions
• Direct investment in shares and bonds direct investment in real estate and corporate
investment in plant, building machinery and equipment with investors holding the
power to control the investment
• The export of capital is treated as a debit item and import of capital as a credit item
in BOP

11. Equilibrium and Disequilibrium of BOP
• BOP=Capital account balance + Current account balance
• If sum BOP=0, BOP is equilibrium
• When BOP>0 ,BOP is disequilibrium
• BOP disequilibrium may be in the form of BOP surplus &
BOP deficit

12. BOP Surplus and Deficit
• BOP Surplus- 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 as favourable balance of payments.
• BOP Deficit- An imbalance in a nation’s balance of payments in which
payments made by the country exceed payments received by the
country. This is also termed as unfavourable balance of payments.
• The current account shows the net amount a country is earning if it is
in surplus, or spending if it is in deficit

13. Uses Of BOP for a business Manager
• 1) A study of a country’s balance of payments and help him in
deciding whether he can borrow/raise funds in a particular
country or invest his funds there.
• 2) A proper analysis of BOP data can reveal trends in factors that
underlie the value of the country currency in a foreign market.

14. Implications of BOP disequilibrium
 Rise in International indebtedness
Adverse impact on economic growth
Rise in unemployment
Financial crisis

15. Kinds of disequilibrium
• Fundamental Disequilibrium
• Disequilibrium due to various reason
• Business Cycle and Cyclical Disequilibrium
• Depending different phases of trade
• Changes in growth of trade
•Structural Changes and Structural Disequilibrium
• Due to shift in demand
• Variation in the international capital movement

16. Policy measure to correct adverse BOP
• Income control measures
• Price control measures
INCOME CONTROL POLICIES
Monetary policy
Fiscal policy
PRICE CONTROL MEASURES
Exchange depreciation
Devaluation

17. 4 conditions which influence devaluation
or exchange depreciation
• Devaluation will improve the BOP only if the sum of elasticity's of home demand for
import and that of foreign demand for export is >1
• Devaluation can be successful only if the affected countries do not devalue their
currency in retaliation.
• Devaluation must not change the cost price structure in favour of imports.
• The Govt. must ensure that inflation, which may be the result of devaluation .