Balance of Payment (BOP)

Balance of Payment (BOP)Balance of Payment (BOP)
Kanchan Kandel
BBA 8th

BackgroundBackground
In a free economy, the price of a country’s
currency depends on the demand and supply of
the currency.
Any factor which increases the demand of the
currency increases its price whereas those factors
which increases the supply of the currency
decreases its price.
The record of such factors is simply termed as
BOP.
kanchan.kandel399@gmail.com

IntroductionIntroduction
Statically records of country’s international transaction over a
certain period of the time presented in the form of double entry
book keeping.
All trade conducted by both the private and public sectors are
accounted for BOP in order to determine how much money is
going in and out.
Example of international transaction includes imports and exports
of goods (balance of trade) and services and cross broader
investment in business, bank account, bond and real assets.
If country received money then its terms as credit(+) transaction
whereas if country pay money than it is term as debit(-)
transaction.

Cont….Cont….
In BOP account, any transaction that results in a receipts from
foreign will be recorded as credit with positive sign whereas any
transaction that results, give rise to a payment to foreigner will be
record as a debit, with a negative sign.
Credit entries in the BOP means results from foreign sales of goods
and services, goodwill, financial claim and real assets.
Debit entries on the other hand arise for purchase of a foreign goods
and services, goodwill, financial claims, and real assets.
Credit entries gives rise to demand for domestic currency, where as
debit entries gives rise to supply of domestic currency.

BOP Credits
•Increases in:
• Domestic
Liabilities
• Revenues
•Decreases in:
• Assets
• Expenses
BOP Debits
•Decreases in:
• Domestic
Liabilities
• Revenue
•Increases in:
• Assets
• Expenses

Type of BOPType of BOP
Current account: It includes exports and imports of
goods and services.
Capital account: It include all the purchase and sales of
assets such as stocks, bonds, bank account, real assets and
business.
Official reserve account: It all the purchase and sales of
internal reserve assets such as foreign currency at foreign
bank, gold and special drawing rights (SDRs).

1 Exports
1.1 Merchandise
1.2 Services
1.3 Factor income
2 Imports
2.1 Merchandise
2.2 Services
2.3 Factor income
3 Unilateral transfer (net)
Balance on current account (1+2+3)
Capital Account
4 Foreign direct investment
5 portfolio investment
5.1 Equity securities
5.2 Debt securities
6 Other investment
Balance of capital account (4+5+6)
7 Official Reserve Account
8 Statistical discrepancies

Current AccountCurrent Account
Current account in BOP can be define as export- imports plus
unilateral transfer.
The deficit on current account (CA) implies that country used up
more than it produce.
Deficit (surplus) represent a reduction (increase) in its net foreign
wealth.
It can be further divided as:
 Merchandise trade : Record of exports and imports of country in tangible
goods. it is shown by balance of trade
 Services: it shows payment and receipts of legal, consulting and engineering
services, royalties for patents and intellectual properties, insurance premiums,
shipping fees and tourist expenditure

Cont…Cont…
 Factor income: It include payments and receipts of interest, dividends and
other income on foreign investment that were previous made.
 If Nepalese investor received interest on their holdings of foreign bonds, for
instance it will be recorded as a credit in balance of payment. Where as
interest payments made by Nepalese Brower to foreign creditors will
recorded as debit.
 Unilateral transfer: Unrequited payment, example including foreign aids,
donation, official and private grants, gifts, remittance.
 Unlike other accounts, in BOP, Unilateral transfer have only one directional
flows, without offsetting flows.
 In merchandise trade, goods flow in one direction and payments flow in the
opposite direction.

Capital AccountCapital Account
The capital account balance measure the difference between Nepal
sales of assets to foreigner and Nepal purchase of foreign assets.
Nepal sales (exports) of assets are record as credit as they result in
capital inflow, whereas Nepal purchase(imports) of foreign assets are
recorded as debit, as they leas to capital outflow
Unlike trade in goods and services, trade in financial assets affect
future payments and receipts of factor income.
It can be divided as:
 Foreign Direct Investment(FDI)
 Portfolio Investment
 Other investment

Cont..Cont..
FDI occurs if return from the foreign investment exceeds from cost of
capital.
Change in exchange rate should offset return. So FDI increase when
Domestic Currency appreciate.
Portfolio investment is investment in shares and bonds.
Sensitive to change in interest rate and change in exchange rate.
Other investment: Transaction in currency, bank deposits, trade
credit and s forth.
Sensitive to change in interest rate and change in exchange rate.
If interest rate rise, ceteris paribus, than capital inflow high and vice
versa.

Cont..Cont..
In short run depreciation in currency will increase
exports and make positive impact on balance of trade.
Country’s current account deficit must be paid for
either by borrowing from foreigner or by selling off
past investment. In the absence of government reserve
transaction, The current account balance must be equal
to the capital account balance, but with opposite sign

Official Reserve AccountOfficial Reserve Account
When a country must make a net payment to
foreigners because of balance of payment deficit, the
central bank of the country should either rundown
official assets
If there is negative sign it would have indicating a supply
of domestic currency because of purchase of gold,
foreign currency.
Central bank sells currency when it is trying to prevent
an appreciation of domestic currency Vis-a Vis other
currency and vice versa

Statistical DiscrepancyStatistical Discrepancy
A discrepancy can exits because of omission or misreport of
transaction or errors in estimating many items.
Recording of payments and receipts arising from international
transaction are done at different time and place, possibly using
different method.
Data on travel expenditure are estimated from questionnaire
surveys of limited number of traveler. The average expenditure
discovered in a survey is multiplied by number of travelers.
Illegal transaction of foreign currency or unreported or
unrecorded income on investment

Balance of Payment (BOP)

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