Balance of Payments

1. Balance of Payments - Meaning
BOP is a Accounting Statement that provides
records of all Economic Transactions, between
resident of a country and the rest of the world
during a particular point of time. Resident means
who is currently living in a country. For Example
a Chinese residing in India is resident under this
BOP.

2. Accounting Statement
• Which is consist of DEBIT and CREDIT
• 1. DEBIT :- All Outflows are recorded in Dr
sides.
• 2.CREDIT:- All Inflows are recorded in Cr sides.

3. Components of B.O.P
Current Account Transactions
• 1. Visible Trade Items
• 2. Invisible Trade Items
• 3. Unilateral Transfers
• 4. Income Receipts and
Payments
Capital Account Transactions
1. Borrowings and Lendings
2. Investments
3. Foreign Exchange Reserves

4. • It includes all types of
physical goods than can
be seen,touched,felt and
measured.
• Import of goods –DEBIT
Side
• Export of Goods – CREDIT
Side
Visible
Items
Components of Current Account

5. • It includes all types of Services
that can not be seen,
touched,felt and measured.
e.g Import and Export of
Services (Banking,insurance
and Educations etc.)
• Import of goods – Debit side
• Export of Services- Credit side
Invisible
Items
Components of Current Account

6. • It Includes, Gifts, Personal
remittance, Donations or we
can say ONE WAY
TRANSACTION, i.e Nothing in
Return.
• It is also known as Unrequired
Transfers.
• Transfer Payments- Debit Side
• Transfer Receipts- Credit Side
Unilateral
Transfers
Components of Current Account

7. • In Includes incomes and the
payments in the form of
Interest,Rent and profits.
• It is Generated through the
CAPITAL ACCOUNTS
Transactions.
• Income Payments:- DEBIT Side
• Income Receipts :- CREDIT
Side
Income
Receipts
and
Payments
To and
From
Abroad
Components of Current Account

8. Components of Capital Account
1. Borrowings
and Lendings
• All Transactions concerned with
Borrowings from abroad and
Lending’s to abroad taken into
consideration.
• Receipts of Loan and Repayments
of loan by Foreigners CREDIT Side.
• Lending’s to abroad and
Repayments to Loan to Abroad-
Debit Side

9. Components of Capital Account
2.
Investments
To and From
Abroad.
• All Transaction of Investments in
Shares, Real Estate etc
inbetween Resident and
Foreigners are taken into
considerations.
• Investments from Abroad –
Credit Side
• Investment to Abroad- Debit
Side

10. Components of Capital Account
3.Change in
Foreign
Exchange
Reserves(FER)
• FER are the financial assets
(Money, Bonds, Securities
etc.) of the Govt. held by
Central Bank.
• Withdrawal from these
Assets-Credit Sides
• Additional to these Assets-
DEBIT Side

11. Difference Between Current and
Capital Account
Basis Current Account Capital Account
Meaning It refers to the account
which records all current
nature transactions
relating to Exports and
Imports of Goods &
Services during the given
period of time
It refers to the account
which records all capital
transactions which causes
the change in the Assets
and Liabilities of a country.
Component It includes visible Trade
(Goods),Invisible
Trade(Services),Unilateral
Transfers(Donations,Person
al remittance etc.) and
income receipts and
payments (Rent, Interest
etc.)
It Includes Capital
Transactions i.e.
Borrowings and Lending’s
with Foreign
countries,Investments TO
and FROM Abroad, change
in Foreign Exchange
Reserves.

12. Difference Between Current and
Capital Account
Basis Current Account Capital Account
Cencept It is a flow concept as it
includes all items of flow
nature. E.g. income from
rent or interest during the
period of one year.
It is a Stock concept as it
includes all items showing
change in Stock. E.g. Net
Assets and Liabilities as AT
Day.
Reflects It reflects Net Income of a
Country.
It reflects net change in
ownership in National
Assets.
Examples Sale and Purchase of
Goods and Services,
Transfer Receipts and
Transfer Payments, Income
Receipts and Income
Payments.
Sale and Purchase of
Shares Bonds and Real
estate, Borrowings and
lending’s etc.

13. BOP Vs BOT
(Balance of Payments and Balance of Trade)
Basis BOT BOP
Meaning BOT refers to difference between amount of
exports and imports of Goods.
BOP is an accounting statement
which provides records of all
Economic Transactions between
Residents and rest of World in a
given period of time
Components It Includes only visible items (goods) It includes
visible(goods),Invisible(Services),
Unilateral
(Donations,Loan,forgiving,Person
al Remittance etc.) and Capital
Transactions.
Capital
Transactions
It does not record any transaction with
capital nature
It records all transaction with
capital nature.
e.g. Borrowing and Lending with
Foreign Country .
Sale and Purchase of shares and
real estate with foreigners.

14. BOP Vs BOT
(Balance of Payments and Balance of Trade)
Basis BOT BOP
Scope It is a narrow concept as it is only a part
of BOP account.
It is a wider concept as it
includes BOT.
SET Off Unfavourable BOT can be set off with
favourable BOP.
Unfavourable BOP cannot be
set off with Favourable BOT as
BOT is only already a part of
BOP.

15. Adverse BOP
• An adverse balance means more money
leaves a country than enters it. It is a strongly
negative sign for that country's economy. In
other words we can say that when the value
of a country's imports of goods and services
are greater than the value of its exports.

16. Reasons of Adverse BOP
Causes Explanation
Developmental Activities Developing countries depend on
developed nations for supply of
machines, technology and other
equipment. This leads to increased levels
of imports, thereby, resulting in a deficit
in the BOP account
High Rate of Inflation When there is a inflation in the domestic
economy, foreign goods become relatively
cheaper as compared to domestic goods.
It increases imports which causes a deficit
in the BOP.
Cyclical Fluctuation When the domestic economy is going
through a phase of boom, then domestic
production may be unable to satisfy the
domestic demand. It leads to a deficit in
BOP, due to increase in imports.

17. Reasons of Adverse BOP
Causes Explanation
Change in Demand Fall in demand for country’s goods in the
foreign markets leads to fall in exports
and it adversely affects the balance of
payments.
Import of Services Underdeveloped countries import
services from developed countries for
which they have to pay huge amounts of
money. It leads to a deficit in BOP.
Political Factors Political instability may lead to large
capital outflows and reduce the inflows of
foreign funds, thus, creating
disequilibrium in the BOP. Frequent
changes in the government, inadequate
support to the government in parliament
also discourage inflows of capital. This
leads to a deficit due to higher outflows
than inflows.

18. Reasons of Adverse BOP
Causes Explanation
Social Factors When the people of underdeveloped
countries come in contact with those of
advanced countries, they start adopting
the foreign pattern of consumption. Due
to this reason, their imports increase and
it leads to an adverse balance of
payments for underdeveloped country.
Unfavourable Change in tastes,
preferences, fashion and trends of
domestic goods lead to a deficit in the
balance of payments.

19. Corrective measures to adverse BOP
• These are the measures used to increase the
exports and lessen the imports.

20. Corrective Measures for Adverse BOP
Corrective Measure Name Explanation
Deflation It means reducing domestic prices to
expand exports and reduce imports. If
steps are taken to check inflation and
bring about fall in prices, its exports will
expand and imports will decline. It will
correct the balance of payments of the
country. It’s done using monetary or fiscal
policy, Price and wage control policy.
Monetary Policy Measures Monetary Policy Measures can be used to
check money supply that will cause
reduction in prices, CRR and Bank Rate
may be raised by the Central Bank (RBI in
INDIA) and selling securities through open
market operations.

21. Corrective Measures for Adverse BOP
Corrective Measure Name Explanation
Trade Policy Measures Trade Policy measures are adopted to
promote exports and reduce imports.
Exports may be encouraged by reducing
or abolishing export duties and lowering
the interest rate on credit used for
financing exports and by granting
subsidies to manufacturers and exporters.
On export earnings lower tax can be
levied to provide incentives to the
exporters to produce and export more
goods and services.
Fiscal Policy Measures Fiscal Policy Measures can be taken to
reduce prices such as imposing new taxes
or raising the rates of existing taxes and to
reduce government expenditure e

22. Corrective Measures for Adverse BOP
Corrective Measure Name Explanation
Devaluation of the National Currency It means reducing the value of exchange
rate of a national currency with respect to
other foreign currencies. Due to this, price
of goods to be exported fall whereas the
prices of imports go up. This encourages
exports and discourages imports and in
turn deficit in BOP will be reduced.
Exchange Controls In this, all exporters are ordered to
surrender their foreign exchange to the
central bank and it is now rationed out
among the licensed importer, No one else
is allowed to import without a license.
BOP.

23. Thanks
Som Prakash
HIPA