1. Balance of Payments (BOP)
Prepared By: Guided By:
Jay Raval Dr. J. P. Majmudar
Vishal Ghoghari
Pinakini Trivedi
Submitted To:
Department of Business Administration,
Faculty of Management,
Bhavnagar University,
Bhavnagar

2. Balance of Payment
 “The balance of payment of a country is a
systematic record of all economic
transactions between the residents of one
country and residents of foreign countries
during a given period of time .”

3. Balance of Trade
• The difference between a country's imports and its
exports. Balance of trade is the largest component of a
country's balance of payments.
• Debit items include imports, foreign aid, domestic
spending abroad and domestic investments abroad.
• Credit items include exports, foreign spending in the
domestic economy and foreign investments in the
domestic economy.
• When exports are greater than imports than the BOT is
favourable and if imports are greater than exports then it
is unfavourable

4. Balance of Trade v/s Balance
of Payment
• The Balance of Payment takes into account all
the transaction with the rest of the worlds
• The Balance of Trade takes into account all the
trade transaction with the rest of the worlds

5. BOP v/s BOT
BOP
1. It is a broad term.
2. It includes all transactions related
to visible, invisible and capital
transfers.
3. It is always balances itself.
4. BOP = Current Account + Capital
Account + or - Balancing item
(Errors and omissions)
5. Following are main factors
which affect BOP
a)Conditions of foreign lenders.
b)Economic policy of Govt.
c) all the factors of BOT
BOT
1. It is a narrow term.
2. It includes only visible items.
3. It can be favourable or unfavourable.
4. BOT = Net Earning on
Export - Net payment for imports.
5. Following are main factors
which affect BOT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods manufactured at
home

6. IMPORTANCE OF
BALANCE OF PAYMENT
It helps…
1. State of International economic
relationship of country
2. A guide to its
monetary, fiscal, exchange & other
polices.
3. Inform govt. about the international
economic position of the country, to
assist in reaching decisions on the
monetary and fiscal polices

7. Structure Of BoP
 Balance of payments is a complete record of
Total Receipts and Total Payments of a country
in relation to other countries over a given time
period. Total Receipts are called CREDIT and
Total Payments are termed as DEBIT.
 Credit side comprises of all those values
received from foreign countries. On the other
hand, Debit side comprises of all the payments
made to other countries.
 It is maintained in a double entry book keeping
system.

8. Structure of BOP
CREDITS DEBITS
ITEMS OF CURRENT ACCOUNT
 Export of Goods  Import of Goods
 Exports of Services  Import of Services
 Unilateral Transfer Receipts (gifts,
indemnities from foreigners).
 Unilateral Transfer Payments (gifts,
indemnities to foreigners).
 Income receipts.  Income Payments
ITEMS OF CAPITAL ACCOUNT
 Capital Receipts ( borrowings from
capital repayments by or sale of assets to
foreigners).
 Capital Payments ( lending to, capital
repayments to or purchase of assets from
foreigners).

9. Components of BoP
 CURRENT ACCOUNT- records transactions
relating to export and import of
goods, services, unilateral transfers and
international incomes. Thus, balance on current
account is the value of exports minus the value
of imports, adjusted for international incomes
and net transfers.
 The export and import of goods are called visible
items whereas invisible items include
shipping, banking, insurance, gifts.

10. Components of BoP
 CAPITAL ACCOUNT-
 records all international economic transactions
relating to change in assets-both financial and
physical. It is a record of short term and long
term capital transactions, both private and
official. These are classifies into two categories-
 Direct foreign investments
 Portfolio investments

11. Disequilibrium In BoP
 A disequilibrium in the balance of
payments may appear either as a surplus
or as a deficit.
 A Surplus in the BOP occurs when Total
Receipts exceeds Total Payments. Thus,
BOP= CREDIT>DEBIT
 A Deficit in the BOP occurs when Total
Payments exceeds Total Receipts. Thus,
BOP= CREDIT<DEBIT

12. DISEQUILIBRIUM IN THE
BALANCE OF PAYMENTS
Types of BOP Disequilibrium:
• There are three main types of BOP
Disequilibrium which are discussed
below:
• Cyclical Disequilibrium,
• Secular Disequilibrium,
• Structural Disequilibrium.

13. Causes of Disequilibrium
1. Natural causes – e.g. floods, earthquake etc.
2. Economic causes – e.g. Cyclical
Fluctuations, Inflation, Demonstration Effect etc.
3. Political causes – e.g. international relation, political
instability, etc.
4. Social factors – e.g. change in taste and preferences etc.

14. Measures To Correct Disequilibrium
in the BOP
Monetary measures
 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.
 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 BOP deficit.

15. Measures To Correct
Disequilibrium in the BOP
 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.
 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.

16. Measures To Correct Disequilibrium
in the BOP
Non- Monetary measures
 Export Promotion
To control export promotions the country may adopt measures to
stimulate exports like:
 export duties may be reduced to boost exports
 cash assistance, subsidies can be given to exporters to increase
exports
 goods meant for exports can be exempted from all types of
taxes.
 Import Substitutes
Steps may be taken to encourage the production of
import substitutes. This will save foreign exchange in the
short run by replacing the use of imports by these import
substitutes.

17. Measures To Correct
Disequilibrium in the BOP
 Import Control
Import may be kept in check through the adoption of a
wide variety of measures like quotas and tariffs. Under
the quota system, the government fixes the maximum
quantity of goods and services that can be imported
during a particular time period.

18. India’s Balance of Payments
• Balance of Payments of a Country - Introduction
• The balance of payments of a country is a systematic
record of all transactions between the residents of a
country and the rest of the world carried out in a
specific period of time.
• India's balance of payment worsened in the early
1990's but now the situation is under control. In
fact, India has a good foreign exchange reserves mainly
due to capital inflows from foreign financial
institutions or the stock exchange.

19. Summary of India's Balance of
Payments (BoP)

20. Main Components of India's Balance
of Payments
1. Trade Balance
Trade balance was in deficit through out the period
shown in the table as imports always exceeded the
exports. Within the imports the POL items
constituting a sizeable position continued to increase
throughout. Exports did not achieve the required
growth rate.

21. 2. Current Account
Current account balance includes visible items
(trade balance) and invisibles is in a more
encouraging position. It declined to $ -2,666
million in 2000-01 from $-9680 million in
1990-91 and recorded a surplus in 2003-04 to
the extent of $ 14,083 million. In 2005-
06, once again there was a deficit of $ 9,186
million.

22. 3. Invisible
The impressive role placed by invisibles in
covering trade deficit is due to sharp rise invisible
receipts. The main contributing factor to rise in
invisible receipts are non factor receipts and private
transfers. As far as non factor services receipts are
concerned the main development has been the
rapid increase in the exports of software services. As
far as private transfers are concerned their main
constituent is workers remittance from abroad.

23. 4. Capital Account
Capital account has been positive throughout
the period. NRI deposits and foreign investment
both portfolio and direct have helped to a great
extent. The main reasons for huge increase in
capital account is due to large capital inflows on
account of Foreign direct investment (FDI);
Foreign Institutional Investors (FIIs) investment
on the stock markets and also by way of Euro
equities raised by Indian firms. The Non-resident
deposit also form a part of capital account.

24. 5. Reserves
Reserves have changed during this
period depending on a balance between current
and capital account. An increase in inflow under
capital account has helped us to build up our
foreign exchange reserve making the country
quiet comfortable on this count. In April 2007 we
had $ 203 billion foreign exchange reserves.

25. Conclusion of India’s BOP
• The balance of payment situation started
improving since 1992-93. There was a
satisfactory balance of payment position in
that period; the reasons are (i) High earnings
from invisibles, (ii) Rise in external commercial
borrowings, and (iii) Encouragement to foreign
direct investment.

26. THANK
YOU