this PPT contains explanation of balance of payments. current account, capital account,official reserve account, equilibrium of bop are explained here in it.autonomous and accommodating items, bop and bot difference.

1. BALANCE OF PAYMENT
PREPARED BY:-
HEMANT KUMAR JAIN
PGT ECONOMICS
KV AMBIKAPUR
• MEANING
• ACCOUNTS
• EQUILIBRIUM OF BALANCE OF PAYMENT
• USE OF OFFICIAL RSERVE ACCOUNT
• AUTONOMOUS AND ACCOMMODATING ITEMS
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2. INTRODUCTION
In an open economy one country has ‘economic
and trade relationship’ with other countries.
They exchange goods, services and capital with
each other.
In international trade foreign currency is
used. It will generate the issue of ‘Balance of
Payment’.

3. MEANING OF BOP
Citizen of one country make different international
economic behavior or transactions with citizens of
other countries. The account of all these
transactions is called Balance of payment.
So we can define BoP as a “systematic account of
all the economic transactions which are made by
residents of country with residents of other
countries within a year”.

4. IMPORTANT POINT
• In India it is made by RBI for a financial year. BoP is a
concept of short run. It does not indicate about long
term conditions.
• It includes all the transactions made in foreign currency
like export and import of visible, export and import of
invisible or capital flows.
• It includes all the transactions weather they are made
by individuals, business units or government.

5. ENTRIES OF BOP
• In BoP all the international transactions are
recorded in ‘Credit and Debit’ side. Every receipt
of international transaction is recorded on Credit
side and every payment is recorded on Debit
side.
• BoP is based on ‘Double Entry system’. It means
every transaction is recorded on both side (credit
and debit sides).

6. ACCOUNTS OF BOP
Mainly BoP has 2 accounts.
• Current account
• Capital account
But these are also shown as parts of capital account
• Error and omissions
• Official reserve account / financial account

7. CURRENT ACCOUNT
It refers to the account which record all the current transactions of
goods , services and unilateral transaction. Main transaction are:-
• Export and Imports of goods or visible
• Export and Imports of factor services or income flows[ it
includes interest, profit, rent, royalty]
• Export and Imports of non-factor services [it includes banking,
insurance, transportation, tourism, purchase by tourists etc.]
• Unilateral Transactions [one sided payments are gifts, grants,
donations, aid etc.]

8. PARTS OF CURRENT ACCOUNT
• Trade account / Visible account:- in this account all the export and
imports of goods or visible is recorded.
• Balance of Trade = Export of Goods – Import of Goods
• Invisible account:- in this account export and imports of factor
services and non factor services and unilateral transactions are
recorded.
• Balance of Invisible = Receipts of [factor services + non factor
services +unilateral transactions] – Payments of [factor services +
non factor services +unilateral transactions]
[Visible are those which can be recorded at port during export and imports. Invisibles
are those which cannot be recorded at port]

9. BALANCE OF CURRENT ACCOUNT
• Balance of Current Account =
Balance of Visible/ Trade
+ Balance of Invisible
• Positive current account indicates that country
can purchase assets and reduce its liability
and vice versa.

10. BALANCE OF CURRENT ACCOUNT
Current Account Surplus Current Account Balanced Current Account Deficit
Receipts > Payments Receipts = Payments Receipts < Payments

11. ENTERIES OF CURRENT ACCOUNT
CREDIT ENTRIES(+)
• Exports of goods
• Transportation, insurance,
banking etc. Non factor services
exported by domestic companies
• Factor services exported by
doctor, engineer, scientist etc.
• Expenditure by foreign
governments on embassies and
staff
• Dividend, interest and profit
received by domestic residents
• Donation, gifts, remittance etc.
Received by domestic residents
DEBIT ENTRIES(+)
• Imports of goods
• Transportation, insurance,
banking etc. Non factor services
imported by domestic companies
• Factor services imported by
doctor, engineer, scientist etc.
• Expenditure by domestic
governments on its foreign
embassies and staff
• Dividend, interest and profit
received by foreign residents
• Donation, gifts, remittance etc.
Paid by domestic residents

12. CAPITAL ACCOUNT
• It refers to the account which shows the changes in assets and
liability of a country. It means capital account record the flow of
debts and investments received and paid. Main transaction are:-
• Foreign investments [ foreign direct investment + foreign indirect
investment / portfolio]
• Borrowings [external commercial borrowings + external
assistance or concessional loan]
• Flow of banking capital
• NRI deposits and Short term debt

13. BALANCE OF CAPITAL ACCOUNT
Balance of Capital Account =
Receipts in capital account
– Payments from capital account

14. ENTERIES OF CAPITAL ACCOUNT
Credit Entries(+)
• Loans received from foreign
government
• Loans received from
international institutions
like World bank, IMF etc.
• Foreign investment received
• Inflow of banking capital
Debit Entries(-)
• Loans given to foreign
government
• Repayment of Loans taken
from international
institutions like World Bank,
IMF etc.
• Investment made in foreign
• Outflow of banking capital

15. EQUILIBRIUM OF BALANCE OF PAYMENT
• Balance of Payment =
Current Account Balance
+Capital Account Balance
+Error and omissions = 0
BoP Deficit BoP Balanced BoP Surplus
Overall Balance < 0 Overall Balance = 0 Overall Balance > 0
Reserve Change > 0 Reserve Change = 0 Reserve Change < 0

16. Equilibrium of Balance of Payment
• According to accounting rules BoP always remain balanced
but in actuality it may be imbalanced and imbalance will be
generated from current account and it will be counter
balanced by capital account and official reserve account.
• When the sum of current account, capital account and
error and omissions is zero then BoP is called balanced or
in equilibrium.
But if sum of above is not zero then
‘Official reserve account’ is used to make it balanced.

17. Official Reserve Account
• It refers to the foreign exchange reserves held with central
bank.
• Every transaction in official reserve account is to create
balance / equilibrium in bop.
• Every transaction in current account and capital account
will generate foreign exchange or decrease foreign
exchange. So finally every transaction will cause a change
in foreign exchange reserves.
• Many countries show official reserve account as a separate
account but it can be shown as a part of capital account.

18. USE OF OFFICIAL RESERVE ACCOUNT
• If BoP is in disequilibrium and Positive
/Surplus:- surplus amount will be stored in
official reserves It shows that there will be an
increase in official reserves and inflow of
foreign currency.

19. USE OF OFFICIAL RESERVE ACCOUNT
If BoP is in disequilibrium and Negative
/Deficit:- deficit amount will be drawn from
official account. It shows that there will be a
decrease in official reserves and outflow of
foreign currency.

20. Autonomous and Transactions/ items
• Autonomous transactions are those transactions
which take place with the purpose of profit.
• They have no meaning with equilibrium of BoP. They
are also called ‘above the line items’.
• All the transactions of ‘Current account and Capital
account’ are Autonomous transactions.

21. Accommodating Transactions/ items
• Accommodation Transactions are those transactions
which take place to make BoP in equilibrium.
• They are directly related with deficit or surplus of
BoP. They are called ‘below the line items’.
• All the transactions related to use of ‘Official Reserve
account’ are the Accommodating transactions.

22. DIFFERENCE
Autonomous Transactions Accommodating Transactions
1. These transactions take
place for profit purpose
2. These transactions are
responsible for deficit or
surplus in BoP.
3. These involve movement of
goods across the countries.
4. Above the line items.
1. These transactions take
place for managing BoP
equilibrium.
2. These transactions are
responsible for correction
deficit or surplus in BoP.
3. These do not involve
movement of goods across
the countries.
4. Below the line items.

23. DIFFERENCE
Balance of Trade Balance of Payment
1. Export of goods – Import
of goods
2. Smaller/ narrow concept
3. It does not include
services, investment,
debt etc.
1. All Receipts in foreign
currency – All Payments in
foreign currency
2. Broader concept[ it includes
balance of trade]
3. It includes all transactions
[goods, services, debt,
investment]