BALANCE OF PAYMENTS

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BALANCE OF PAYMENTS - ECONOMICS

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BALANCE OF PAYMENTS

  1. 1. ECONOMICS FOR MANAGERS BALANCE OF PAYMENTS 1 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  2. 2. DEFINITION “THE BALANCE OF PAYMENTS OF A COUNTRY IS A SYSTEMATIC RECORD OF ALL ECONOMIC TRANSACTIONS BETWEEN RESIDENTS OF A COUNTRY AND REST OF THE WORLD. IT PRESENTS A CLASSIFIED RECORD OF ALL RECEIPTS ON ACCOUNT OF GOODS EXPORTED, SERVICES RENDERED AND CAPITAL RECEIVED BY RESIDENTS AND PAYMENTS MADE BY THEM ON ACCOUNT OF GOODS IMPORTED AND SERVICES RECEIVED FROM THE CAPITAL TRANSFERRED TO NON RBI ST.ALOYSIUS FOREIGNERS & RESIDENTS OR INSTITUTE OF MANAGEMENT“.TECHNOLOGY (AIMIT) 2
  3. 3. MEANING (IN SIMPLE) 3 IN A NUTSHELL THE BOP OF ANY COUNTRY IS “A SYSTEMATIC RECORD OF ALL ECONOMIC TRANSACTIONS BETWEEN THE RESIDENTS OF A GIVEN COUNTRY (SAY INDIA) AND OF THE RESIDENTS OF REST OF THE WORLD IN AN ACCOUNTING PERIOD” ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  4. 4. MEANING (IN SIMPLE) THE BOP STATEMENTS RECORDS BOTH PAYMENTS AND RECEIPTS BY A COUNTRY. IT IS ALSO A BALANCE SHEET OF RECEIPTS & PAYMENTS OF A COUNTRY DURING AN ACCOUNTING YEAR. 4 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  5. 5. COMPONENTS OF BALANCE OF PAYMENTS UNILATERAL TRANSFERS A/C LONG TERM CAPITAL A/C SHORT TERM CAPITAL A/C SERVICE S A/C GOODS A/C 5 BALANCE OF PAYMENTS INTERNATIONA L LIQUIDITY A/C ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  6. 6. GOODS ACCOUNT  ITEMS OF FOREIGN EXCHANGE EARNINGS SPENDINGS/PAYMENTS AND  INCLUDES VALUE OF MERCHANDISE EXPORTS AND THE VALUE OF MERCHANDISE IMPORTS ST.ALOYSIUS INSTITUTE OF MANAGEMENT  THESE ARE VISIBLE & TECHNOLOGY (AIMIT) ITEMS 6
  7. 7. GOODS ACCOUNT IF   7 RECEIPTS OF EXPORTS > PAYMENTS FOR IMPORTS => POSITIVE RECEIPTS OF EXPORTS<PAYMENTS FOR IMPORTS => NEGATIVE ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  8. 8. SERVICES ACCOUNT  RECORDS ALL THE SERVICES EXPORTED & IMPORTED BY COUNTRY IN A YEAR  SERVICES ARE INTANGIBLE (INVISIBLE) ITEMS IN BOP  WHY INVISIBLE-??? BECAUSE UNLIKE 8 GOODS, THEY ARE NOT RECORDED IN THE PORT OF ENTRY & TECHNOLOGY (AIMIT) ST.ALOYSIUS INSTITUTE OF MANAGEMENT
  9. 9. SERVICES ACCOUNT SERVICE TRANSACTIONS INCLUDE – (a)TRANSPORTATION, BANKING, INSURANCE RECEIPTS & PAYMENTS FROM & TO FOREIGN COUNTRIES (b) TOURISM, TRAVEL SERVICES & TOURIST PURCHASES OF GOODS & SERVICES RECEIVED FROM FOREIGN TOURISTS TO INDIA AND INDIAN TOURISTS GONE ABROAD 9 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  10. 10. SERVICES ACCOUNT SERVICE TRANSACTIONS INCLUDE – (c) EXPENSES OF STUDENTS STUDYING ABROAD AND RECEIPTS FROM FOREIGN STUDENTS STUDYING IN HOME COUNTRY (d) EXPENSES OF DIPLOMATIC & MILITARY PERSONNEL STATIONED ABROAD AND FROM SIMILAR PERSONNEL FROM OVERSEAS WHO 10 ARE ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT) STATIONED IN THE HOME
  11. 11. SERVICES ACCOUNT SERVICE TRANSACTIONS INCLUDE – (e) INTERESTS, PROFITS, DIVIDENS AND ROYALITIES RECEIVED FROM FOREIGN COUNTRIES PAID OUT TO FOREIGN COUNTRIES 11 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  12. 12. UNILATERAL TRANSFER ACCOUNT • THIS ACCOUNT INCLUDES ALL GIFTS, GRANTS AND REPARATION RECEIPTS AND PAYMENTS TO FOREIGN COUNTRIES • UNILATERAL TRANSFER CONSIST OF 2 TYPES OF TRANSFERS(a) Government Transfers, (b) Private Transfers 12 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  13. 13. UNILATERAL TRANSFER ACCOUNT (a)Government Transfers – Foreign aids receipts Eg:- US FOREIGN AID to INDIA (b) Private Transfers – Funds received from or remitted to foreign countries on person-to-person basis Eg:- A Indian settled in Australia remitting $100 a month to his aged parents in IndiaST.ALOYSIUS unilateral (pvt)TECHNOLOGY (AIMIT)inflow is a INSTITUTE OF MANAGEMENT & transfer 13 item in the Indian BOP
  14. 14. LONG TERM CAPITAL ACCOUNT • INCLUDES THE AMOUNT OF CAPITAL THAT HAS MOVED INTO OR OUT OF THE COUNTRY IN A YEAR. • LONG-TERM CAPITAL ACCOUNT INCLUDES THE FOLLOWING CATEGORIES:(a) Private Direct Investment (b) Private Portfolio Investment (C)Government OF Loans & TECHNOLOGY (AIMIT) to foreign ST.ALOYSIUS INSTITUTE MANAGEMENT 14 governments
  15. 15. LONG TERM CAPITAL ACCOUNT (a)Private Direct Investment – Investments done by Indian (persons & firms) in foreign countries and vise versa b) Private Portfolio Investment – Investments done by Indian citizens and firms in foreign securities or stocks or bonds or shares and vise versa c) Govt Loans to foreign investments 15 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  16. 16. SHORT TERM CAPITAL ACCOUNT • • • • 16 BANK DEPOSITS & OTHER SHORT TERM PAYMENTS AND CREDIT ARRANGMENTS FALL INTO THIS CATEGORY. ITEMS WHICH FALL DUE ON DEMAND OR IN LESS THAN 1 YEAR ERRORS & OMMISSIONS INCLUDED IN SHORT TERM CAPITAL A/C OR UNRECORDED TRANSACTIONS AS A SEPARATE BOP A/C. THESE ERRORS INCLUDE (a) Statistical & recording errors (b) Smuggling (C) Illegal & secret capital movements (d) Imperfect ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT) estimation procedures
  17. 17. INTERNATIONAL LIQUIDITY ACCOUNT • RECORDS NET RESERVES. • LISTS INTERNATIONAL ACCEPTABLE MEANS OF SETTLING INTERNATIONAL OBLIGATIONS. 17 CHANGES IN FOREIGN ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  18. 18. UNDERSTANDING INTERNATIONAL LIQUIDITY ACCOUNT SURPLUS CASE:- ($ MILLION) CREDIT DEBIT (RECEIPTS) (PAYMENTS) 1 1500 800 2 SERVICES ACCOUNT 500 1400 3 UNILATERAL TRANSFERS ACCOUNTS 100 120 4 LONG TERM CAPITAL ACCOUNT 900 400 5 SHORT TERM CAPITAL ACCOUNT 500 630 6 INTERNATIONAL LIQUIDITY ACCOUNT 7 18 GOODS ACCOUNT BALANCE OF PAYMENTS 150 3500 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT) 3500
  19. 19. UNDERSTANDING INTERNATIONAL LIQUIDITY ACCOUNT SURPLUS CASE:- ($ MILLION) THE LOGIC OF $150 MILLION AS DEBIT/PAYMENT IS A) PURCHASE OF IMPORT OF GOLD WORTH $150 MILLION; OR B) NET ADDITION TO ACCUMULATION OF FOREIGN RESERVES OF $150 MILLION; OR C) CAPITAL LENDING IN THE SUM OF $150 MILLION TO OTHER COUNTRIES ON SHORT TERM OR LONG TERM BASIS 19 DEBIT ENTRY = SURPLUS ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  20. 20. UNDERSTANDING INTERNATIONAL LIQUIDITY ACCOUNT DEFICIT CASE:- ($ MILLION) CREDIT DEBIT (RECEIPTS) (PAYMENTS) 1 800 1500 2 SERVICES ACCOUNT 1400 500 3 UNILATERAL TRANSFERS ACCOUNTS 120 100 4 LONG TERM CAPITAL ACCOUNT 400 900 5 SHORT TERM CAPITAL ACCOUNT 630 500 6 INTERNATIONAL LIQUIDITY ACCOUNT 150 7 20 GOODS ACCOUNT BALANCE OF PAYMENTS 3500 3500 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
  21. 21. UNDERSTANDING INTERNATIONAL LIQUIDITY ACCOUNT DEFICIT CASE:- ($ MILLION) DEFICIT IS FINANCED BY A) SELLING OR EXPORTING GOLD WORTH $150 MILLION; OR B) DRAWING DOWN UPON THE PAST ACCUMULATED FOREIGN RESERVES = $150 MILLION; OR C) BORROWING CAPITAL IN THE SUM OF $150 MILLION ON SHORT TERM OR LONG TERM BASIS FROM FRIENDLY COUNTRIES OR INTERNATIONAL INSTITUTIONS LIKE IMF ETC 21 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT) CREDIT ENTRY = DEFICIT
  22. 22. BOP SCHEDULE - SAMPLE MAJOR ACCOUNTS CREDITS DEBITS Net Surplus (+) (Receipts) (Payments) or Deficit (-) GOODS A/C 200 180 20 SERVICES A/C 100 250 -150 300 430 -130 UNILATERAL TRANSFERS ACCOUNT 300 120 180 BALANCE OF PAYMENTS ON CURRENT A/C (I+II+III) 600 550 50 LONG TERM CAPITAL ACCOUNT 150 120 30 BASIC BALANCE (I + II + III + IV) 750 670 80 50 40 10 BALANCE OF PAYMENTS ON CAPITAL ACCOUNT (IV + V) 200 160 40 OVERALL BALANCE OF PAYMENTS (B+D) 800 710 90 BALANCE OF TRADE (I + II) SHORT TERM CAPITAL ACCOUNT 90 INTERNATIONAL LIQUIDITY ACCOUNT BALANCE OF PAYMENTS ACCOUNTING BALANCE 22 800 800 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT) 0
  23. 23. THANK YOU 23 ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

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