1.Balance of Payment The balance of payment of a country is a systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries. 2.Componets of BOP Current Account It includes imports and exports of goods and services and unilateral transfer of goods and services. Capital Account Under this are grouped transactions leading to changes in foreign assets and liabilities of the country. 3. Accounting Treatment of Items (Debit and Credit Items) Any item which gives rise to a sale of foreign exchange (an inflow) is recorded as a credit item (+) in the accounts e.g. export of goods and services Any item which gives rise to the purchase of foreign exchange (an outflow) is recorded as a debit item (-) in the accounts e.g imports of goods and services. 4. BOP Disequilibrium BOP is a double entry accounting record, then apart from errors and omissions, it must always balance. The BOP deficit or surplus indicate imbalance in the BOP. This imbalance is interpreted as BOP Disequilibrium. A country’s balance of payments is said to be in disequilibrium when its autonomous receipts (credits) are not equal to its autonomous payments (debits). 5.BOP Deficit A deficit or an unfavorable balance exists when the value of autonomous debit items exceeds the value of autonomous credit items. 6. BOP Surplus A surplus or a favourable balance exists when the value of autonomous credit items exceeds the value of autonomous debit items.

1. Presentation on
Balance of Payment
Disequilibrium & Causes

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

3. Componets of BOP
•Current Account
It includes imports and exports of goods and
services and unilateral transfer of goods and
services.
•Capital Account
Under this are grouped transactions leading to
changes in foreign assets and liabilities of the
country.

4. Accounting Treatment of Items
(Debit and Credit Items)
•Any item which gives rise to a sale of foreign
exchange (an inflow) is recorded as a credit item
(+) in the accounts e.g. export of goods and
services
•Any item which gives rise to the purchase of
foreign exchange (an outflow) is recorded as a
debit item (-) in the accounts e.g imports of goods
and services.

5. BOP Disequilibrium
•BOP is a double entry accounting record, then
apart from errors and omissions, it must always
balance.
•The BOP deficit or surplus indicate imbalance in
the BOP.
•This imbalance is interpreted as BOP
Disequilibrium.
•A country’s balance of payments is said to be in
disequilibrium when its autonomous receipts
(credits) are not equal to its autonomous payments
(debits).

6. BOP Deficit
•A deficit or an unfavorable balance exists when
the value of autonomous debit items exceeds the
value of autonomous credit items.

7. BOP Surplus
• A surplus or a favourable balance exists when the
value of autonomous credit items exceeds the value
of autonomous debit items.

8. Types of Disequilibrium
•Cyclical Disequilibrium
Disequilibrium caused by trade cycles
Terms of trade and growth of trade undergo a
change as a result of trade cycles. It affects BOP.
It can be corrected by import-export adjustment
•Secular Disequilibrium
When an economy undergoes intensive changes, it
causes secular or long term disequilibrium in the
BOP

9. Types of Disequilibrium Cont…
•Structural Disequilibrium
▫When structural changes take place in some
sectors of the economy, they effect import-export
trade of the country resulting in structural
disequilibrium
•Fundamental Disequilibrium
▫When a country suffers chronic disequilibrium in
its BOP, then according to IMF it will be called
fundamental disequilibrium.
•Temporary Disequilibrium
▫Short term factors account for temporary
disequilibrium in BOP.

10. Causes of Disequilibrium
•Economic factors – The important economic
factors are
1.Structural changes in the economy
2.Changes in exchange rates (overvaluation /
undervaluation)
3.Changes in the level of foreign exchange reserves
4.Cyclical fluctuations
5.Inflation / deflation
Developmental expenditure undertaken by developing
countries, etc.

11. Causes of Disequilibrium cont…
•Social factors – The social factors may include
changes in tastes & preferences due to
demonstration affect, population growth rate, rate
of urbanization, etc.
•Political factors – The political factors may
include – political stability / instability in a
country, war, change in diplomatic policy, etc.

12. Measures to correct disequilibrium in
BOP
lSustained or prolonged deficit has to be settled by
short term loans or deplition of capital reserve of
foreign exchange and gold.

13. Following remedial measures are
recommended…
•(i)Export Promotion:
•Export should be encouraged by granting various
bounties to manufacturers and exporters. At the
same time , imports should be discouraged by
undertaking import substitution and imposing
reasonable tariffs.

14. l(ii)Import:
lRestrictions and Import Substitution are other
measures of correcting disequilibrium.
l(iii)Reducing Inflation:
lInflation (continuous rice in prices) discourages
exports and encourages imports. Therefore,
government should check inflation and lower the
prices in the country.

15. l(iv)Exchange Control:
lGovernment should control foreign exchange by
ordering all exporters to surrender their foreign
exchange to the central bank and then ration out
among licensed importers.

16. l(v)Devaluation of Domestic Currency:
lIt means fall in the external (exchange) value of
domestic currency in terms of a unit of foreign
exchange with makes domestic goods cheaper for
the foreigners. Devaluation is done by a
government order when a country has adopted a
fixed exchange rate system. Care should be taken
that devaluation should not cause rise in internal
price level.

17. l(vi)Depreciation:
lLike devaluation, depreciation leads to fall in
external purchasing power of home currency.
Depreciation occurs in a free market system
wherein demand for foreign exchange far exceeds
the supply of foreign exchange market of a country
(Mind, Devaluation is done in fixed exchange rate
system).

18. Thank you