Balance of payments-components-Equilibrium-types-disequilibrium-types-causes for the disequilibrium-corrective measures

1. Balance of payments

2. Definition of bop
 According To Sloman And John, ‘ Balance Of Payment Is An Accounting Record Of All Monetary
Transactions Between A Country And The Rest Of The World”
 According To Charles Kindle Berger’ The Bop Of A Country Is A Systematic Recording All
Economic Transactions Between Residents Of That Country And The Rest Of The World During A
Given Period Of Time’

3. Meaning of balance of payments
 It Is A Statistical Record Of A Country’s Transactions With The Rest Of The World Over A Certain
Period Of Time Presented In The Form Of Double Entry Book Keeping.
 It Is The Accounting Record Of All Monetary Transactions Between A Country And The Rest Of The
World
 It Is The Defined As The systematic Record Of Transactions Between Its Residents And Foreign
Residents Over A Specified Period
 Each transaction is recorded in accordance with the principles of double entry book
keeping(money involved is entered on each of the two sides of the BOPs)

4. Structure of BOPs
 Trade balance
 Current account balance
 Capital account balance
 Errors and omissions
 Foreign exchange reserves

5. Trade balance
 Is the difference between export and import of goods, usually referred as
visible or tangible items
 If the exports are more than imports there will be trade surplus and if imports
are more than exports there will be trade deficit
 Trade balance forms a part of current account

6. Current account balance
 It is the difference between receipts and payments on account of current account which
includes trade balance.
 The current account includes export of services, interest, profits ,dividends and unilateral
receipts from abroad and import of services, profits , interest,dividends and unilateral
payments abroad.

7. Capital account balance
 It is the difference between receipts and payments on account of capital
account. The transactions under this involves inflows and outflows relating to
investments, short term borrowings, lending and medium term to long term
borrowings/lending
 When credits are more than debits –surplus will take place
 When debits are more than credits-deficits will take place

8. Errors and omissions
 In reality BOP may not balance, due to errors and omissions.
 Errors may be due to statistical discrepancies and omissions may be due to
certain transactions may not get recorded

9. Foreign exchange reserves
 The balance of foreign exchange reserve is the combined effect of current
and capital account balances. The reserves will increase when:
 The surplus capital account is much more than the deficit in current account
 The surplus in current account is much more than deficit in capital account
 Both the current account and capital account shows a surplus

10. Bop account
Receipts (credits) Payments (debits)
1. Export of goods Imports of goods
Trade account balance
2. Export of services
Import of services
3. Interest, profit and dividends received Interest, profit and dividends paid
4. Unilateral receipts Unilateral payments
5. Foreign investments Investment abroad
6.Short term borrowings Short term lending
7. Medium and long term borrowing Medium and long term lending
8. Errors and omissions Errors and omissions
9. Change in reserves(+) Change in reserves(-)
Total receipts
====
Total payments
Current account balance( 1 to 4)
Capital account balance ( 5 to 7)

11. Components of bop’s
 The current account
 The capital account
 The financial account
 The statistical discrepancy

12. Current account
 Records all receipts and payments from goods and services transactions with
foreigners
 These transactions are divided into 3 distinct categories
 GOODS AND SERVICES
 INVESTMENT INCOME
 CURRENT TRANSFERS

13. CAPITAL ACCOUNT
 IT IS MADE UP OF CAPITAL TRANSFERS
 MIGRANTS ASSETS
 PUBLIC SERVICE SUPERANNUATION BENEFITS’
 DEBT FORGIVENESS AND
 INHERITANCE FUNDS
 INTANGIBLE ASSETS
IPR
PATENTS

14. THE FINANCIAL ACCOUNT
 RECORDs Canada’s financial transactions with foreign countries including
short term and long term movements of capital
 There are two types of capital movements
 Direct investments in the ownership or control of a business
 Portfolio investments which are purchases of company stocks and bonds both public
and private

15. Statistical discrepancy(errors and
omissions)
 The double entry book keeping principle states that for every credit, there is
a corresponding debit and therefore, there should be a balance in BOP as
well.
 In reality BOP may not balance because of errors and omissions
 Errors may be due to statistical discrepanices and omissions may be due to
certain transactions may not get recorded.

16. Foreign exchange reserves
 The balance of foreign exchange reserve is the combined effect of current
and capital account balances. The reserves will increase when:
 The surplus capital a/c is more than the deficit in current a/c
 The surplus in current a/c is more than deficit in capital a/c
 Both the current a/c and capital a/c shows a surplus
 In 2009-10 India's FER increased by 13.4 usd billion

17. Bop always balances due to the
following
 Goods, services and resources traded internationally are paid for; thus every
movement of products is offset by a balancing movement of money or some
other financial asset
 surplus in the current a/c is offset by a deficit in the capital a/c.
 A deficit in the current a/c must be offset by a surplus in the capital a/c

18. Equilibrium in bops
 Bop is the difference between the receipts from and payments to foreigners
by residents of a country
 Bop must always balance
 Debits must be equal to credits
 So there will be equilibrium in bop
 Symbolically, b=r-p
 When b=0, there will be equilibrium in bops
 When b is positive = favourable bops
 When b is negative= unfavourable bops

19. Types of equilibrium
 Static equilibrium:
 here, exports equal imports including exports and imports of services as well as
goods and other items on the bops,
 short term capital, long term capital and monetary gold are on balance zero.
 National money incomes should be in equilibrium vis-à-vis money incomes abroad.
 The foreign exchange rate must be in equilibrium
 Dynamic equilibrium: in the longrun the exports and imports differ by the
amount of long term autonomous capital movements made in a normal
direction

20. Types of Disequilibrium in BOP
 Structural disequilibrium
 Structural disequilibrium at goods level
 Strucutural disequilibrium at factors level
 Cyclical disequilibrium
 Short run disequilibrium
 Long run disequilibrium
 Monetary disequilibrium
 Exchange rate fluctuations

21. Causes of disequilibrium in BOP-
Economic, Political and Social Causes
 Import related causes
 Population growth
 Development program
 Imports of essential items
 Reduction of import duties
 Inflation
 Demonstration effect
 Export related causes
 Increase in population
 Inflation
 Appreciation of currency
 Discovery of substitutes
 Technological development
 Protecctionist trade policy

22.  Other causes
 Flight of capital
 Globalisation
 Cyclical transmission
 Structural adjustments
 Political factors

23. Measures to correct disequilibrium in
BOP
 I. Monetary meausres
 1. monetary policy
 Inflation
 deflation
 2. Fiscal policy
 Inflation
 deflation
 3. Exchange rate policy
 Devaluation
 depreciation
 II. Non-monetary /General measures
 Tariffs
 Quotas
 Export promotion
 Import sustitution

24. Causes of disequilibrium in the BOP in
India
 Revenue oriented tariffs
 Adverse terms of trade
 Import substitution policy of India
 Export of primary commodities
 Capital account problem
 Trade restrictions of developed countries
 Inflation
 Ever increasing demand for imports

25. Reasons for Poor performance of India’s
export trade
 I. export related problems
 HIGH prices
 Poor quality
 Poor negotiation skills
 Inadequate promotion
 Poor follow up of sales
 II. General causes
 Good domestic market
 Number of formalities
 Problem of trading blocks
 Negative attitude
 Poor infrasctructure

26. Methods of correcting disequilibrium
 Exchange depreciation (price effect) or devaluation(by government)
 Deflate the currency
 Tariffs
 Import quotas and
 Export duties