This document discusses the balance of payments (BOP) of a country. It defines BOP as a systematic record of all economic transactions between a country and the rest of the world over a period of time, usually annually. It notes that the BOP has two components - the current account, which covers visible and invisible trade, and the capital account, which covers financial transactions like investments. A country experiences a BOP surplus if it receives more foreign currency than it spends, and a deficit if it spends more than it receives. It also discusses factors that can cause BOP disequilibria and measures governments can take to address BOP deficits.

1. BALANCE OF
PAYMENTS
VINAY KENKERE
ASST. PROFESSOR
GFGC- HOSADURGA

2. Meaning of Balance of Payment
(BOPs)
 At present, no country can remain in isolation
from rest of the world.
 Every country is exporting/importing goods,
services and making different capital
transactions with other countries.

3.  Balance of payments (BOPs) account is an
accounting record of all monetary transactions
between a country and the rest of the world.
 These transactions include payments for the
country's exports and imports
of goods, services, financial capital, and financial
transfers. The BOPs account summarizes
international transactions for a specific period,
usually a year, and is prepared in a single
currency, typically the domestic currency for the
country concerned.

4. Features of BOP
 It is a systematic record of all economic
transactions between one country and the rest of
the world.
 It includes all transactions, visible as well as
invisible.
 It relates to a period of time. Generally, it is an
annual statement.
 It adopts a double-entry book-keeping system. It
has two sides: credit side and debit side. Receipts
are recorded on the credit side and payments on
the debit side.

6. The General Rule in BOPs
Accounting
 If a transaction earns foreign currency for the
nation, it is a credited and is recorded as a
plus item.
 If a transaction involves spending of foreign
currency it is a debited and is recorded as a
negative item.

7. Balance of Trade
There are two concepts relating to international
transactions balance of trade and balance of
payment.
Balance of Trade refers to the difference
between the value of total imports and export
of visible physical goods. Balance of trade, as
a matter of fact, is a part of balance of
payments. It may be of three kinds:

8.  Surplus or Favourable Balance of
Trade: Exports > Imports
 Deficit or Unfavourable Balance of
Trade: Exports < Imports
 Equilibrium Balance of Trade: Exports =
Imports

9. Components of BOP
 Current Account: Balance of payments on
current account includes the value of imports
and exports of both visible (goods) and invisible
items (services).
Balance of payments on current account =
(visible + invisible exports) - (visible + invisible
imports)

10.  OP on current account is a statement of actual
receipts and payments in short period.
 It includes the value of export and imports of
both visible and invisible goods.
 There can be either surplus or deficit in current
account.
 The current account includes:- export & import of
services, interests, profits, dividends and
unilateral receipts/payments from/to abroad.

11.  Capital Account: Capital account refers to
financial transactions. It mainly includes foreign
investment and external loans.
 All kinds of short-term and long-term international
capital transfers, foreign debts, foreign
investments payments and receipts on account of
interest and grants, etc. are also included in
capital account.

12.  It is difference between the receipts and
payments on account of capital account.
 It refers to all financial transactions.
 The capital account involves inflows and
outflows relating to investments, short term
borrowings/lending, and medium term to long
term borrowing/lending.
 There can be surplus or deficit in capital account.
 It includes: - private foreign loan flow, movement
in banking capital, official capital transactions,
reserves, gold movement etc.

13.  Overall balance of payments: total of
country’s balance of payment on current
account and capital account is known as
overall balance of payments.
Balance of Payments = (Export of Goods +
Export of Services + Capital Receipts) –
(Imports of Goods + Import of Services +
Capital Payments).

14. Kinds of BOPs
 Favorable Balance of Payments: An imbalance in a nation's balance of payments
in which payments made by the country are less than payments received by the
country. This is also termed a balance of payments surplus.
 It's considered favorable because more currency is flowing into the country than is
flowing out. Such an unequal flow of currency will expand the supply of money in the
nation and subsequently cause a decrease in the exchange rate relative to the
currencies of other nations.
 This then has implications for inflation, unemployment, production, and other facets
of the domestic economy.

15.  Unfavorable Balance of Payments: An imbalance in a nation's
balance of payments in which payments made by the country
exceed payments received by the country.
 This is also termed a balance of payments deficit. It's considered
unfavorable because more currency is flowing out of the country
than is flowing in.
 Such an unequal flow of currency will reduce the supply of money in
the nation and subsequently cause an increase in the exchange
rate relative to the currencies of other nations. This then has
implications for inflation, unemployment, production, and other
facets of the domestic economy.

16. Foreign Exchange Reserves
Foreign-exchange reserves or forex reserves or FX
reserves are assets held by central
banks and monetary authorities, usually in
different reserve currencies, mostly the United
States dollar, and to a lesser extent in the euro,
the United Kingdom pound sterling, and
the Japanese yen.
Foreign-exchange reserves includes
 Foreign Exchange Assets of RBI in the form of
foreign currency deposits and bonds.
 Gold Stock of RBI
 SDR holdings of the Government.

17. External Debts
External debt (or foreign debt) is that portion of a
country's debt that was borrowed from foreign
lenders including commercial banks,
governments or international financial institutions
such as the International Monetary Fund (IMF)
and World Bank. The debtors can be the
government, corporations or private households.
External finance is meant to supplement and
support developing countries’ domestic resource
mobilization. These loans, including interest, must
usually be paid in the currency in which the loan
was made.
A debt crisis can occur if a country with a weak
economy is not able to repay external debt due to the
inability to produce and sell goods and make a
profitable return.

18. BOPs and Foreign Exchange
Reserves
The country’s ability to import would be limited by the
foreign exchange it has earned from its exports, or
from what is called the ‘current account’ – unless it
chooses, as countries often do, to finance their deficit
by borrowings, i.e. from the ‘capital account’.
To the extent that the deficit is not financed by the
capital account, it will experience a reduction in its
foreign currency ‘cash balance’, i.e. a fall in its forex
reserves. In the same way, forex reserves will increase if
the exports are more than the imports.
Deficit/Surplus of the current account + Deficit/Surplus of
the capital account = Net change in foreign exchange
reserves

19. Causes for disequilibrium
 Economic Factors:
 (a) Imbalance between exports and imports. (It is the
main cause of disequilibrium in BOR),
 (b) Large scale development expenditure which causes
large imports,
 (c) High domestic prices which lead to imports,
 (d) Cyclical fluctuations (like recession or depression)
in general business activity,
 (e) New sources of supply and new substitutes.

20.  Social Factors
 (a) Changes in fashions, tastes and preferences
of the people bring disequilibrium in BOP by
influencing imports and exports;
 (b) High population growth in poor countries
adversely affects their BOP because it increases
the needs of the countries for imports and
decreases their capacity to export.

21.  Political Factors
 Instability
 Foreign Trae Policies

22. Measures
Export
promotion:
Reduced
Import
Reducing
inflation:
Exchange
control:
Devaluatio
n of
domestic
currency:

23. Factors Affecting Current
Account
The most important factors affecting current
account are
Inflation
Economic Growth
Government Restrictions
Exchange Rates

24. Conclusion
The government should deeply analyse
implications of factors affecting BOPs on
Indian economy while formulating EXIM
Policy and supplementary plans and
polices for the export promotion, import
substitution, reducing current account
deficit, etc. and should formulate the
policies smartly for the economic growth
and development of Indian economy.

25. Thank You