Balance of Payment for B Com and B A Economics

1. BALANCE
OF
PAYMENTS
NITHIN KUMAR
DEPARTMENT OF ECONOMICS
DPDPSPGFGC MANGALURU

2. INTRODUCTION
Balance of payments (BOP) accounts are an accounting record of all
monetary transactions between a country and the rest of the world.
These transactions include payments for the country's exports and
imports of goods& services,financialcapital,andfinancialtransfers.
Acountry hasto dealwith othercountries in respectof 3items:-
Visible items which include all types of physical goods exported and
imported.
Invisible items which include all those services whose export and import are
not visible.e.g.transport services,medicalservicesetc.
Capital transfers which are concerned with capital receipts and capital
payment.

3. DEFINITION
According to Kindle Berger, "The balance of payments of a country is a
systematic record of all economic transactions between the residents of
the reporting country and residents of foreign countries during a given
periodoftime".

4. FEATURES
It is a systematic record of all economic transactions between one
countryandtherestofthe world.
It includesalltransactions,visibleaswellasinvisible.
It relates to aperiod of time. Generally,it isanannual statement.
It adopts a double-entry book-keeping system. It has two sides: credit
side and debit side. Receipts are recorded on the credit side and
paymentsonthedebit side

5. COMPONENTS OF BALANCE OF
PAYMENT
Credits (+) (Receipts) Debits (-) (Payments)
Current Account
Exports Imports
1. Goods 1. Goods
2. Services 2. Services
3. Transfer Payments 3. Transfer Payments
Current Account
1. Borrowings From Foreign Countries 1. Lending to Foreign Countries
2. Direct Investments by Foreign
Countries
2. Direct Investments in Foreign
Countries
Official Settlement Account
1. Increase in Foreign official Holdings 1. Increase in official reserve of gold
and foreign currencies
Errors and Omissions

6. CURRENTACCOUNT
• BOPon current account is a statement of actual receipts and
paymentsin shortperiod.
• It includes the value of export and imports of both visible
and invisible goods. There can be either surplus or deficit in
currentaccount.
• The current account includes:- export & import of services,
interests, profits, dividends and unilateral
receipts/payments from/toabroad.

7. CAPITALACCOUNT
It is difference between the receipts and payments on account of capital
account. It refers to all financial transactions.
The capital account involves inflows and outflows relating to investments,
short term borrowings/lending, and medium term to long term
borrowing/lending.
Therecanbesurplusordeficitincapitalaccount.
It includes: - private foreign loan flow, movement in banking capital, official
capital transactions, reserves,gold movementetc.

8. OFFICIAL SETTLEMENTACCOUNT
Official Settlement Account measures the change in nation’s
liquidity and non liquidity liabilities to foreign official holders
and the change in a nation’s official reserve assets during the
year.
The official reserve assets of a country include its gold stock,
holdings of its convertible foreign currencies and SDRs, and
its net position in the IMF
It shows transactions in a country’s net official Reserve
Assets.

9. ERRORS AND OMISSIONS
Errors and omissions is a balancing item so that total credits and
debits of the three accounts must equal accordance with the
principle of double entry book keeping so that balance of payments
of a country always balances in the accounting sense.

10. DISEQUILIBRIUM IN
BALANCE OF PAYMENT
The balance of payment is said to be equilibrium when the demand
for a country’s currency is equal to the supply of it.
Disequilibrium in Balance of Payment takes place when the demand
for foreign exchange exceeds its supply or vice versa.
When demand for foreign currency exceeds it supply – Deficit BOP
When supply of Foreign Exchange exceeds its demand – Surplus
BOP

11. TYPES OF
DISEQUILIBRIUM IN BOP
1. Cyclical Disequilibrium
2. Secular Disequilibrium
3. Structural Disequilibrium
4. Developmental Disequilibrium
5. Monetary Disequilibrium
6. Fundamental Disequilibrium
7. Temporary Disequilibrium

12. 1. Cyclical Disequilibrium in BOP
 Cyclical Disequilibrium in Balance of Payment occurs because of the
operation of the business cycles.
2. Secular Disequilibrium
 Secular disequilibrium in Bop takes place because of the operation of
long term and deep sweated changes in the economy.
 Long term factors such as changes in population, technological
changes, changes in the rate of capital formation etc…

13. 3. Structural Disequilibrium
 It takes place due to structural changes in the economy affecting the
demand and supply relations in commodity and factor market.
4. Developmental Disequilibrium
 Developmental disequilibrium is peculiar to the less developed and
developing countries which are on the road to development.
 In these countries, because of developmental needs, the imports are
bound to exceed their exports, creating a deficit BOP

14. 5. Monetary Disequilibrium
 it is a kind of disequilibrium in BOP which is caused by the expansion of
the supply of Money in the Economy.
Inflation is one of the powerful factors bringing about monetary
disequilibrium.
Monetary disequilibrium is common in Developing Economies
6. Fundamental Disequilibrium
Long-run or fundamental disequilibrium refers to a persistent deficit or a
surplus in the balance of payments of a country. It is also known as secular
disequilibrium.

15. 7. Temporary Disequilibrium
It is a short Period Disequilibrium
It usually occurs due to the outbreak of war

16. CAUSES OF DISEQUILIBRIUM IN BOP
Disequilibrium
in BOP
Natural
Causes
Economic
Causes
Domestic
Inflation
Cyclical
Fluctuation
Capital
Movement
Huge
Development
Projects
Tardy
Technological
Progress
Exhaustion of
Certain Natural
Resources
Other
Economic
Factors
Political
Causes

17. Natural Causes
Natural Calamities like Flood, Earthquake etc… are responsible for the
disequilibrium in balance of payment of an Economy

18. Economic Causes
1. Domestic inflation
2. Cyclical fluctuation
3. Capital Movements
4. Huge Developmental Projects
5. Tardy Technological Progress
6. Exhaustion of certain Natural Resources
7. Other Economic Factors
 Rapid growth of Population, demonstration Effect, restrictive import
policy by the developed countries etc..
 Political Causes

19. METHODS OF
CORRECTING BOP
The measures to correct the BOP may be examined under
two heads
Automatic Measure
Deliberate Measure
Automatic Measure
 Under the Gold Standard Mechanism, disequilibrium of
BOP corrected.

20. Deliberate Measures
• It can be classified into Trade Measures and Monetary Measures
Deliberate
Measures
Trade
Measures
Monetary
Measures

21. TRADE MEASURES
The trade measures to correct disequilibrium in BOP consist of
measures to promote export and Reduce imports
Trade Measures
Export
promotion
Import
Substitution/
Reduction in
Imports

22. EXPORT PROMOTION
The exports of a can be increased by providing subsidy to export
Industry, tax concession, reduction in export duties etc…

23. REDUCTION IN IMPORTS
It is possible to reduce the import of a country by adopting the
following measures
Imposition of new tariff and increasing the existing import duties
By introducing the quota system
By a system of compulsory licensing
By way of import or commercial prohibitions

24. MONETARY MEASURES
1. Deflation
2. Devaluation
3. Exchange Rate Depreciation
4. Exchange Control
5. Encouragement to Foreign investment
6. Encouragement to Tourism

25. MONETARY MEASURES
 Deflation
 Deflation is the reduction in the quantity of money to reduce
prices and incomes. In the domestic market, when the
currency is deflated, there is a decrease in the income of the
people. This puts curb on consumption and government can
increase exports and earn more foreign exchange.

26.  Devaluation
 Devaluation is lowering the exchange value of the official
currency. When a country devalues its currency, exports becomes
cheaper and imports become expensive which causes a reduction
in the BOPdeficit.

27.  Exchange Rate Depreciation
 By reducing the value of the domestic currency, government can
correct the disequilibrium in the BOP in the economy. Exchange
rate depreciation reduces the value of home currency in relation to
foreign currency. As a result, import becomes costlier and export
become cheaper. It also leads to inflationary trends in the country,

28.  Exchange Control
 All exporters are directed by the monetary authority to surrender
their foreign exchange earnings, and the total available foreign
exchange is rationed among the licensed importers. The license-
holder can import any good but amount if fixed by monetary
authority.

29. Encouragement to Foreign Investment
By Encouraging Foreign investment, it is possible to procure extra foreign
exchange which could be used to reduce the deficit in the BOP

30.  Encouraging Tourism
By encouraging the tourism of the country the government can earn the
much required foreign exchange reserve which will help to reduce the
disequilibrium in the BOP of the Economy