Balance of payment

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Balance of payment

  1. 1. Balance of paymentDefinitionA Balance of Payment account is a statement of double entry system ofrecord of all economic transactions (involving foreign payments) betweenresidents of a country and the rest of the world carried out in specificperiod of time.CURRENT ACCOUNT• All transactions relating to goods, services and unrequited transfersconstitute current account• Flow of items pertaining to specific period of time• Visible items include goods• Invisible items include ServicesCAPITAL ACCOUNT• All transactions indicating changes in stock magnitudes concerningcapital receipts and payments constitute capital account• Relates to- Borrowing- Capital repayment- Sale of assets- Change in stock of gold- Change in reserve of foreign currencyShort term capital movement includes:Purchase of short term securitiesSpeculative purchase of foreign currencyCash balances held by foreignersNet balance of current accountLong term capital movement includes:Investments in shares, bonds, physicalassets etc.Amortization of capital
  2. 2. Disequilibrium• Total receipts and total payments inequality shows disequilibrium ofbalance of payments account• Total receipt and payment arising from autonomous transactionsdetermine the deficit or surplus in the balance of payments• If payments>receipts, BOP shows Deficit• If payments<receipts, BOP shows SurplusKINDS OF BOP DISEQUILIBRIUM• Fundamental Disequilibrium• Cyclical Disequilibrium• Structural DisequilibriumCAUSES OF DISEQUILIBRIUM• Increase in imports• Slow progress in exports• Burden of interest payments• International developments• Deficit in capital account

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