INTERNATIONAL FINANCE - INTERNATIONAL FINANCIAL MANAGEMENT

1. Dr. Mohamed Kutty
Kakkakunnan
Associate Professor
P G Dept. Of Commerce
N A M College Kallikkandy
Kannur – Kerala - India

2. B A L A N C E O F PAY M E N T S
• Countries like individuals are not self sufficient
• Deficit in many respects and surpluses in certain other
respects
• Deal with other countries and nations for survival and growth
• Each country has to enter into economic transactions with
other countries of the world
• Innumerable transactions between nations
• Receives from and makes payment to other countries
• Balance of Payments is a statement of accounts of these
receipts and payments
• Refers to the recording of all economic transactions of a given
country with rest of the world

3. A country deals with other country in respect of three items:
1. Visible Items
Includes all kind of physical goods imported and exported
2. Invisible Items
It includes all kind of import export services
3. Capital Transfers
Concerned with capital receipts and capital payments like
investment by foreigners in India
 Like an ordinary trader, each country has to work out a balance
in respect of its dealing, in all the above three items, with
other countries of the world in a given period
 Thus it comes to know how much it has to pay to other
countries and how much it has to receive from other countries
and what is the position of overall balance

4. Definitions
 The balance of payments of a country is
 “ a systematic record of all economic transactions between its
residents and residents of foreign countries.” –Kindleberger
 “A record of the monetary transactions over a period of time with
the rest of the world” – Benham
 “A systematic record of all economic transactions between its
residents and residents of the rest of the world during specified
accounting period’- IMF
 It shows the flow of a country's revenue from other countries and
its payments to other countries for a given period of time
• Records the inflow and outflow of foreign exchange

5. Features of Balance of Payments
1. Systematic Record: a systematic record of receipts and payments
of a country with other countries.
2. Fixed Period of Time: It is a statement of account pertaining to a
given period of time - one year
3. Comprehensiveness: It includes all the three items i.e. Visible,
Invisible and Capital Transfers
4. Double entry System: Receipts and payments are recorded on the
basis of double entry system.
5. Adjustment of Differences : Adjustments are made as and when
needed to correct the difference in actual total receipts and
payments
6. All Items-Government and Non-Government

6. Structure/Forms BOP
Balance of payments has three forms:
1. Current account
2. Capital account
3. Overall balance of payments
Current Account
• BOP in current account includes the value of imports
and exports of both visible (goods) and invisible items
(services)
• Current account transactions are called account of
actual transactions, because all items included in it are
actually transacted
• These items have a direct effect on the income, output
and employment of a country’s economy

7.  Balance of payment on current account = (Visible
+Invisible exports ) - (Visible +Invisible Imports)
• BOP on current account - balanced and unbalanced
• In case of balanced position of BOP, receipts and
payment on account of exports and imports are equal
• In case of unbalanced balance of payments, it can be in
deficit or in surplus.
• Disequilibrium of the balance of payments on current
account is usually balanced with the help of
transactions in capital accounts.

8. Capital Account
 Capital account refers to financial transactions.
 mainly includes foreign investment and external loans.
 All kinds of short term and long term international capital
transfers, movement of gold, foreign debts, foreign
investments, payments and receipts on account of interest
and grants, etc. are also included in capital account.
 All transactions under capital account are concerned
merely with financial transfers between our country and
other foreign countries.
Overall Balance of Payments
 Total of a country’s balance of payments on current
account and capital account is known as overall balance of
payments.

9. Items included in BOP
On the basis of the above the following items are included:-
1. Payment for merchandise imports and receipts for exports
2. Loans and investments both received from other countries and
granted to other countries
3. Receipts and payments for travel and tourism by persons of the
countries
4. Money paid or received for transportation of goods and persons
between countries
5. Payments and receipts for rendering services between persons
belonging to different countries
6. Receipts and payments of interest, dividends etc
7. Gifts, donations, awards etc paid or received by a country

10. Disequilibrium in Balance of Payments
• Because of several reasons, especially due to
differences in the value of exports and
imports, disequilibrium in balance of
payments may be caused.
• Disequilibrium may sometimes be on minus /
deficit / unfavorable side and sometimes on
plus / surplus / favorable side.
• Thus, two kinds of disequilibrium :-

11. Favorable Balance of Payments
• When receipts are more than payments then balance of
payments turns favorable
• This situation increases foreign exchange reserves
• Exports of goods, services and capital receipts are more than
import of goods, services and capital payments
• Also known as Surplus Balance of Payments
• Favorable when the payments (debit) of the country are less
than its receipts (credit)
• Bf=R-P >0 )
(Here Bf =Balanced balance of Payment; R = Receipts ;
P = Payments ;
• R-P>0= indicates that Receipts are greater than payments or
their difference is positive

12. Unfavorable Balance of Payments
• Payments are more than receipts
• Reduces foreign exchange reserves
• Exports of goods, services and capital receipts are less than
import of goods, services and capital payments
• Also known as Deficient Balance of Payments
• Payments (debit) of the country are more than its receipts
(credit).
• Bu = R-P<0
• Here, Bu= unfavorable balance of payments; R= receipts;
P = payments
• R-P <0=Receipts, are less than payments or their difference is
negative

13. Equilibrium in Balance of Payments
• When capital receipts of a country and exports(visible and
invisible) are equal to its capital payments and imports(visible
and invisible) then its balance of payments is in equilibrium
• B=R-P = 0
• Here, B = balanced balance of payments; R = Receipts
P =Payments
 To conclude
• Balance of payments is unfavorable, to meet the deficit
between receipts and payments a country either makes
payments in terms of gold or borrows from abroad for a short
period
• On the contrary, if to meet the surplus between receipts and
payments a country either receives payment in terms of gold or
lends to foreign countries for a short period, the balance of
payments is said to be favorable

14. Main Causes of Unfavorable Balance of Payment of India
1.Import of Machinery
2. Import of War equipments:
3. More demand of Consumption Goods
4. Price disequilibrium
5. Expenditure on Embassies
6. Foreign Competition
7. Increase in price of Crude Oil
8. Payments of interest on foreign Debts
9. Less growth in Exports
10. Gulf War
11. Disintegration of USSR

15. Measures/Suggestions to correct disequilibrium in the Balance
of Payments
Two measures for (1) increasing export and (2) reducing import
1. Promotion of Exports
2. Increase in Production
3. Encouragement to Foreign Investment
4. Trade Agreements
5. Attraction to Foreign Tourists
6. Devaluation of Indian Currency
7. Deflation
8. Restriction on Imports
9. Import Substitution

16. Balance of Trade Balance of Payments
1. A statement recording the
imports and exports done in
goods by /from the country
with other countries during a
particular period
2. Accounts for only for physical
items
3. Does not include capital
receipts and payments
4. May show, deficit or surplus or
balanced
5. A major segment of BOP
6. Provides only half picture of
the country's economic
position
1. A statement of all monetary
transactions performed
internationally by the country
during a given period
2. Shows both physical as well as
non-physical items
3. Include capital receipts and
payments
4. BOP always balanced
5. Balance of trade is an
important element of BOP
6. Provides complete view of a
county's economic position