Balance of payments,prashant jain

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Balance of payments

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Balance of payments,prashant jain

  1. 1. Balance of Payments Prashant jain International business
  2. 2. Part I Balance of Payments Accounting
  3. 3. <ul><ul><li>Records of transactions among nations have not always been kept. Are they very recent? </li></ul></ul>Balance of Payments Accounting
  4. 4. <ul><ul><li>General use of BP accounting is more recent, but in 1381 Richard Aylesbury, an Englishman, had not only collected such statistics, but was developing analysis as to why the accounts behaved as they did. </li></ul></ul>Balance of Payments Accounting
  5. 5. <ul><ul><li>It is not clear that they are really necessary! </li></ul></ul>Balance of Payments Accounting
  6. 6. <ul><li>For example, who keeps track of Gujrats balance of payments transactions with other Indian states? </li></ul>Balance of Payments Accounting
  7. 7. <ul><li>What kind of records should be kept? </li></ul><ul><li>What do you want to find out? </li></ul><ul><li>The nature of the record changes by what we are trying to find out. </li></ul>Balance of Payments Accounting
  8. 8. <ul><li>What kind of things do governments wish to know? </li></ul><ul><li>What is the international demand for our currency doing to its value? </li></ul><ul><li>Do we have enough currency reserves, or capacity to pay for our trade? </li></ul><ul><li>Does our trade promote full employment? And so on. </li></ul>Balance of Payments Accounting
  9. 9. Balance of Payments Accounting <ul><li>What kinds of transactions represent the basic focus of balance of payments accounting? </li></ul><ul><li>All transactions between the citizens of a nation and those of other nations are recorded in the balance of payments for a given period of time. </li></ul>
  10. 10. Recording International Payments <ul><li>How is information recorded in balance of payments accounting? </li></ul><ul><li>The basic technique is standard, double-entry accounting, </li></ul><ul><li>a flow of funds statement that shows changes in assets, liabilities and net worth over time. </li></ul>
  11. 11. Recording International Payments <ul><li>The balance of payments statement is to inform government authorities of the international position of the country to assist them with monetary-fiscal questions as well as trade and payments policies. </li></ul>
  12. 12. Debits, Credits, and International Payments <ul><li>What is the meaning of a debit in a balance of payments account? What is a credit? </li></ul><ul><li>A debit records a transaction increasing assets or reducing liabilities. </li></ul>
  13. 13. Debits, Credits, and International Payments <ul><li>A debit results from some kind of transaction requiring an immediate out-payment. </li></ul><ul><li>A debit arises from the purchase of goods, claims, or reserve assets and represents an inflow of value. </li></ul>
  14. 14. Debits, Credits, and International Payments <ul><li>A credit records a transaction reducing assets or increasing liabilities. </li></ul><ul><li>It results from some kind of transaction requiring an immediate in-payment. </li></ul><ul><li>A credit arises from the sale of goods, claims, or reserve assets and represents an outflow of value. </li></ul>
  15. 15. Sources and Uses of Funds <ul><li>How does a country derive foreign currencies it needs to conduct its international business? </li></ul><ul><li>The sources of funds, the supply of foreign exchange , are </li></ul><ul><li>exports, </li></ul><ul><li>investment income, </li></ul>
  16. 16. Sources and Uses of Funds <ul><li>The sources of funds, the supply of foreign exchange , are </li></ul><ul><li>transfer payments received, </li></ul><ul><li>and long-term and short-term borrowing. </li></ul>
  17. 17. Sources and Uses of Funds <ul><li>Credit entries reflect the sources, debit entries indicate the uses of foreign exchange. </li></ul>
  18. 18. Part II The Balance of Payments Accounts
  19. 19. BALANCE OF PAYMENTS ACCOUNTS <ul><li>These accounts are to summarize payments a country receives from other nations and payments it must make to other nations. </li></ul><ul><li>They consist of the following five categories: </li></ul><ul><li>1. MERCHANDISE OR TRADE BALANCE: </li></ul><ul><li>(Exports minus imports ) </li></ul>
  20. 20. BALANCE OF PAYMENTS ACCOUNTS <ul><li>2. GOODS AND SERVICES BALANCE: </li></ul><ul><li>(Just add services) </li></ul><ul><li>3. NET UNILATERAL TRANSFERS </li></ul><ul><li>(Gifts) </li></ul><ul><li>Indian government transfers to foreigners </li></ul><ul><li>( E.g ., Foreign aid or wheat from Indian stockpiles) </li></ul><ul><li>Private remittances of wages earned abroad, and </li></ul><ul><li>Lots of other transfers. </li></ul>
  21. 21. BALANCE OF PAYMENTS ACCOUNTS <ul><li>To here, we are looking at the </li></ul><ul><li>CURRENT ACCOUNT BALANCE </li></ul><ul><li>(Net flows of goods, services and gifts). </li></ul><ul><li>Again: </li></ul><ul><li>1. MERCHANDISE OR TRADE BALANCE: </li></ul><ul><li>2. GOODS AND SERVICES* BALANCE: </li></ul><ul><li>3. NET UNILATERAL TRANSFERS </li></ul>
  22. 22. Balance of Payments <ul><li>There is also a set of asset flows referred to as the </li></ul><ul><li>CAPITAL ACCOUNT BALANCE </li></ul><ul><li>4. NET CHANGES IN FOREIGN HOLDINGS OF INDIAN ASSETS </li></ul><ul><li>Flows of financial assets and similar claims, or </li></ul><ul><li>Foreign direct and other investments into India, or </li></ul><ul><li>“ Private capital flows.” </li></ul><ul><li>(Note that we are talking direct and portfolio investments here). </li></ul>
  23. 23. Balance of Payments <ul><li>5. NET OFFICIAL INTERNATIONAL RESERVE TRANSACTION </li></ul><ul><li>Foreign official holdings of INDIAN assets, </li></ul><ul><li>INDIAN holdings of official reserve (gold and foreign exchange) assets </li></ul><ul><li>or, “Official asset flows.” </li></ul>
  24. 24. All Together Now <ul><li>1. MERCHANDISE OR TRADE BALANCE: </li></ul><ul><li>2. GOODS AND SERVICES* BALANCE: </li></ul><ul><li>3. NET UNILATERAL TRANSFERS </li></ul><ul><li>4. NET CHANGES IN FOREIGN HOLDINGS OF U.S. ASSETS </li></ul><ul><li>5. NET OFFICIAL INTERNATIONAL RESERVE TRANSACTION </li></ul>
  25. 25. Balance of Payments <ul><li>THE BALANCE OF PAYMENTS IS, THEREFORE, THE SUM OF THE CURRENT AND CAPITAL ACCOUNT BALANCES. </li></ul>
  26. 26. Services in the Balance of Payments <ul><li>Note: </li></ul><ul><li>*Services include travel and tourism, trade transportation, insurance, education, financial, technical, telecommunications and other business and professional services. </li></ul><ul><li>In addition there are royalties, payments for capital services besides interest, such as dividends, payments for foreign labor, etc. </li></ul>
  27. 27. Overall Surpluses and Deficits <ul><li>What is an overall balance of payments surplus? What is an overall deficit? </li></ul><ul><li>A surplus is when the sum of the current account plus the private capital account is counterbalanced by an accumulation of official net assets, so official reserve assets increase. </li></ul>
  28. 28. Overall Surpluses and Deficits <ul><li>What is an overall balance of payments surplus? What is an overall deficit? </li></ul><ul><li>If it is in deficit , the sum is counterbalanced by an accumulation of official net liabilities, so the country sees its official reserve assets decline. </li></ul>
  29. 29. <ul><li>The current account balance is the difference between domestic saving and domestic investment. If domestic saving falls, the Country must borrow from abroad to finance domestic investment… </li></ul><ul><li>INDIAN foreign indebtedness is not necessarily bad if foreign funds are used towards investment. </li></ul>
  30. 30. <ul><li>Repayment of the debt is potentially a problem if foreign funds are used to purchase consumption goods since future generations will bear the burden of debt. </li></ul>
  31. 31. <ul><li>Poole presents evidence that the rising current account deficit is associated with rising domestic investment, and a significant share of foreign investment in the INDIA is equity investment which does not have to be repaid. He concludes that the INDIA does not have a current account disorder.” </li></ul>
  32. 32. <ul><li>If a foreign firm builds a production facility in the INDIA, the capital and financial account surplus increases, which, in turn, means that the INDIAN current account deficit would increase. </li></ul><ul><li>The rising current account deficit in recent years has been accompanied by a rising rate of Indian domestic investment. </li></ul>

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