The balance of payments records a country's economic transactions with the rest of the world. It has three components: visible items like exports and imports of goods, invisible items like services, and capital transfers. The balance of trade is the difference between exports and imports of visible items and can be in surplus, deficit, or equilibrium. The balance of payments includes all transactions and must always balance, while the balance of trade can be unequal. Countries use measures like devaluation, import restrictions, export promotion, and capital controls to correct an adverse balance of payments.

1. Balance of Payment

2. Meaning:
Refers to the recording of all economic
transactions of a given country with rest of
the world.

3. Three items in which a country
deal:
 Visible items – all types of physical goods
exported and imported.
 Invisible items - all services whose export
and import are not visible.
 Capital transfers – concerned with all
capital receipts and payments.

4. Balance of Trade
“It refers to difference in value of imports
and exports of only physical goods or
visible items.”
Balance of Trade= exports of visible items-
imports of visible items

5. Types of BOT
 Surplus/favorable
 Deficit/unfavorable
 Equilibrium

6. Difference between BOP and BOT
BOP BOT
Broad Concept Narrow concept
all Visible Items
Always balance Can be Surplus/deficit
Deficit can be met by BOP Deficit cannot be met by BOT
More significant Less significant

7. Structure of Balance of payment
 Credit side : includes those values
received or are likely to be received from
abroad.
 Debit side : includes all payments made to
other countries.

8. Forms of Balance of Payment
 Current Account:
1. Statement of actual receipts and payments in the short period .
2. Includes value of imports and exports of both visible and invisible
items.
3. Transactions are called account by actual transactions.
4. These items have a direct effect on the income, output and
employment of a country’s economy.
5. BOP on current account may be both balanced / unbalanced.
6. Disequilibrium of BOP on current account is usually balanced by
medium of capital account.

9. Capital Account
 Refers to financial transactions
 All kinds of short-term and long term international capital transfers,
movement of gold, payments on private account, payments and
receipts on national institutional account and government loans,
interests, grants etc.
 They have no effect on income, output and employment of a
country’s economy
 They are merely financial transfers.

10. Overall balance of Payment
 Total of country’s current account and
capital account
 Always balance

11. Components of current account
 Export and import of visible goods
 Invisible items-services:
1. Services rendered by commercial undertakings
like banks,insurance companies
2. Services of experts
3. Travelling
4. Transportation
5. Governmental transactions
6. Donations and gifts

12. Components of Capital Account
 Private Foreign Loan Flow
 Movement in Banking Capital
 Reserves, Monetary Gold and SDR
 Gold Movement

13. Causes of Disequilibrium in BOP
 Natural Causes
 Economic Development Plans
 Cyclical Fluctuations
 Changes in Foreign currency rates.
 Decline in Foreign Demand
 Changes in terms of trade
 Foreign capital Investment flow
 Political Instability
 International Relation
 Changes in tastes and preferences

14. Measures to correct Adverse
Balance of payment
 Deflation
 Devaluation
 Exchange Control
 Discouraging Imports
 Import duties
 Import Quotas
 Encouraging Import Substitution
 Export Promotion
 Encouragement to Foreign Investment
 Attraction to foreign tourists
 Liberal Industrial Policy