Balance of payment

1. Balance of
Payment
By Dr. Vandana Singh
(researcher & educator)

2. Introduction
Balance of Payment is a systematic record of all
economic transactions between the residents of the
country and the rest of the world in a particular period
country and the rest of the world in a particular period
of time, usually a year.

3. Components of BOP
Balance of payments comprises of three kinds of
accounts –
• Current Account,
• Capital Account and
• Capital Account and
• Financial Account.
The current account calculates the total value of
imports and exports of goods and services.

4. Components of Current Account:
1. Merchandise Transactions or Visible Trade (Export
and Import of Goods i.e. BOT )
2. Invisible Trade (Export and Import of Services i.e.
BOI): Shipping, Banking, and Insurance etc.
3. Unilateral Transfers (One sided Transactions):
Unilateral transfers include gifts, donations, personal
remittances and other ‘one-way’ transactions.
4. Income, receipts and payments to and from
abroad: It includes investment income in the form
of interest, rent and profits.

5. Balance of Trade
The balance of trade is the difference between the
value of a country's imports and exports goods for a
given period.
BOT BOP
BOT BOP
Its record transactions relating to
trade of goods only.
Its record transactions relating to
both goods and services.
It is a part of current account of the
BOP.
It is more comprehensive and has
three accounts of which BOT is a part.

6. Components of Capital Account:
Capital Account is used to: Finance deficit in current account or absorb
surplus of current account.
The main components of capital account are:
1. Foreign Investments : It includes FDI and FPI.
FDI: refers to the physical investment made by foreign investors
FDI: refers to the physical investment made by foreign investors
in the domestic country. e.g. investment into building,
machinery and equipment etc.
FPI: refers to the short- term investment by foreign entity in
financial market. These are indirect investments and include in
investments tradable securities, such as shares, bonds,
debentures of the company.

7. 2. Loan or Borrowings :
Govt. loans . External assistance, ECBs (External Commercial
Borrowing ), trade credit etc.
3. Banking Capital: it includes NRI (non-resident Indian)
deposits.

8. BOP may be:
• + favorable {surplus, dr.(outflow)< cr.(inflow)}
• - unfavorable {deficit, dr.>cr.}
=
• = balance {dr.=cr.}

9. Causes of unfavorable BOP
• Import of machinery
• Import of war equipments
• more demands of goods
• Increase in imports
• Payment of interest on external debts
• Payment of interest on external debts
• Increase in consumption and price of crude oil etc.

10. Policy measures to manage unfavorable BOP
• Import substitution
• Export promotion
• Tapping invisibles
• Increasing efficiency
• Encouragement of tourist traffic
• Encouragement of tourist traffic
• Exchange inflow of foreign capital
• Bilateral agreements