Categories of Balance ofPayments:1. Balance of Trade2. Balance of Current Account3. Balance of Capital Account
1. Balance of Trade Shows the balance of imports and exports of visible goods. BoT = X - M
2. Balance of Current Account It is made up of visibles, invisible s and transfers. BoCA = Bo Trade+ Bo Invisibles+ Bo Transfer
2. Balance of Current Account The CA is a measure of all payments made for currently produced goods and services plus non-trade flows of funds between a country and rest of the world. Non-trade flow comprise of factor income from abroad and international transfer payments.
3. Balance of Capital Account It refers to the balance of capital transfers, borro wing and lending and sales from or purchase of stocks of gold.
Two types of Capital Flows1. Autonomous C.F. 2. Accommodating C.G. Ordinary capital flows Made specifically to Because of normal bring the balance of payments into economic equilibrium considerations like i.e. if there is deficit in earning of current account, it will dividends, interest and have to be settled by other incomes an accommodating i.e., if U.S. invests in capital inflow India
The foreign currency necessary to Similarly, a A deficit on finance the surplus in CABoCA and Bo CA must be excess must be Capital settled by a imports must matched by aAccount are net surplus in be either deficit in theinterrelated the capital borrowed capital account. from some account other country or … from reserves
Know Balance of Payments It is kept in Sum total Always in standard Most of balance equilibrium double-comprehen of current in entry sive and capital accounting book- concept account sense keeping system
Causes of BoP Disequilibrium 1. Fall in foreign demand 2. Inflationary pressures in the economy 3. Developmental expenditures 4. Increase in cost structure of export industries 5. Decrease in supply 6. Appreciation in the exchange rate 7. Increased debt burden 8. Demonstration effect 9. Population pressure 10. Political factors
Measures to correct disequilibrium 1. Depreciation 2. Devaluation 3. Import control 4. Export promotion 5. Exchange controls 6. Production of import substitutes 7. Monetary policy 8. Fiscal policy 9. Capital import