eco chap 12

1. Balance of Payments

2. Balance of Payment
 Balance of Trade & Balance of Payment are concepts related to
International Trade
 Balance of Trade is a record of goods or merchandise i.e. Includes
only visible items
 Balance of Payment is a comprehensive record of all transactions
of a country with other countries during a given year i.e. Includes
both visible & invisible items – goods & services
 Prof Kindleberger; BOP is the systematic record of all economic
transactions between the residents of the reporting country &
residents of foreign countries

3. Structure of BOP
 It has two sides i.e. Payments & Receipts

4. Structure of BOP
 BOP is broadly classified in 3 accounts i.e. Current A/C,
Capital A/C & Reserve A/C
 First 4 items are of Current A/C i.e. records of export &
import of goods & services & unilateral transfers
 Unilateral Transfers refer ti items that have no correspinding
receipt or payment i.e. Donations, Remittances, Gifts etc.
 Capital A/C is category 5 & 6
 Reserve A/C is category no. 7 it is maintained by Central
bank in terms of gold, foreign currencies

5. Difference between BOT & BOP

6. Disequilibrium in BOP
 Disequilibrium in BOP can be of 2 types i.e. Either
Surplus or Deficit
 Surplus BOP is when receipts are more than
payment and in Deficit when payments are more
than receipts
 Disequilibrium in BOP can be explained in 2 terms
i.e. Autonomous & Accommodative Transactions

7. Disequilibrium in BOP
 Autonomous Transactions - A transaction undertaken in
normal course of Business. Includes all Exports & Imports of
goods & services. Transactions are profit motivated. It does
NOT take into A/C the equilibrium aspect of BoP – Termed
as Above the line transactions
 Accommodative Transactions - Transaction undertaken with
the specific intention of adjusting the imbalance arising out of
other transactions. Not profit oriented – Termed as below the
line transactions

8. Causes of Disequilibrium
 Development Projects
 Trade Cycles
 Growth in Population
 Demonstration Effect
 Trade barriers
 Capital Transactions
 Technological
Advancement
 Inflation
 Political Instability
 Lack of Co-operation

9. Types of Disequilibrium
 Cyclical Disequilibrium
 Prosperity, Recession, Depression & Recovery
 Structural Disequilibrium
 Change in Taste, Technological advancement, war or natural
calamities etc.
 Short Run Disequilibrium
 1 – 2 years – failure of monsoon, industrial strike etc.
 Long Run Disequilibrium
 Fundamental disequilibrium – change in population, hike in oil
prices, increase in imports

10. Methods to Correct Disequilibrium
Monetary Methods Non-Monetary
 Deflation
 Exchange Depreciation –
1$ = 50 then 1$ = 60
 Devaluation
 Exchange Control –
restrictions on the usage of
forex – to have strict
imports
 Tariffs
 Quotas
 Export Promotion
 Import Substitution

11. Questions
1. Explain BoP & its structure
2. Short Note – Distinguish between BOT & BoP
3. Explain Disequilibrium in BoP & its types
4. Throw light on the causes of disequilibrium of BoP
5. Explain Monetary Method to correct Disequilibrium
6. Explain Non - Monetary Method to correct
Disequilibrium