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Balance of payments module-1
- 2. Definition of bop According To Sloman And John, ‘ Balance Of Payment Is An Accounting Record Of All Monetary Transactions Between A Country And The Rest Of The World” According To Charles Kindle Berger’ The Bop Of A Country Is A Systematic Recording All Economic Transactions Between Residents Of That Country And The Rest Of The World During A Given Period Of Time’
- 3. Meaning of balance of payments It Is A Statistical Record Of A Country’s Transactions With The Rest Of The World Over A Certain Period Of Time Presented In The Form Of Double Entry Book Keeping. It Is The Accounting Record Of All Monetary Transactions Between A Country And The Rest Of The World It Is The Defined As The systematic Record Of Transactions Between Its Residents And Foreign Residents Over A Specified Period Each transaction is recorded in accordance with the principles of double entry book keeping(money involved is entered on each of the two sides of the BOPs)
- 4. Structure of BOPs Trade balance Current account balance Capital account balance Errors and omissions Foreign exchange reserves
- 5. Trade balance Is the difference between export and import of goods, usually referred as visible or tangible items If the exports are more than imports there will be trade surplus and if imports are more than exports there will be trade deficit Trade balance forms a part of current account
- 6. Current account balance It is the difference between receipts and payments on account of current account which includes trade balance. The current account includes export of services, interest, profits ,dividends and unilateral receipts from abroad and import of services, profits , interest,dividends and unilateral payments abroad.
- 7. Capital account balance It is the difference between receipts and payments on account of capital account. The transactions under this involves inflows and outflows relating to investments, short term borrowings, lending and medium term to long term borrowings/lending When credits are more than debits –surplus will take place When debits are more than credits-deficits will take place
- 8. Errors and omissions In reality BOP may not balance, due to errors and omissions. Errors may be due to statistical discrepancies and omissions may be due to certain transactions may not get recorded
- 9. Foreign exchange reserves The balance of foreign exchange reserve is the combined effect of current and capital account balances. The reserves will increase when: The surplus capital account is much more than the deficit in current account The surplus in current account is much more than deficit in capital account Both the current account and capital account shows a surplus
- 10. Bop account Receipts (credits) Payments (debits) 1. Export of goods Imports of goods Trade account balance 2. Export of services Import of services 3. Interest, profit and dividends received Interest, profit and dividends paid 4. Unilateral receipts Unilateral payments 5. Foreign investments Investment abroad 6.Short term borrowings Short term lending 7. Medium and long term borrowing Medium and long term lending 8. Errors and omissions Errors and omissions 9. Change in reserves(+) Change in reserves(-) Total receipts ==== Total payments Current account balance( 1 to 4) Capital account balance ( 5 to 7)
- 11. Components of bop’s The current account The capital account The financial account The statistical discrepancy
- 12. Current account Records all receipts and payments from goods and services transactions with foreigners These transactions are divided into 3 distinct categories GOODS AND SERVICES INVESTMENT INCOME CURRENT TRANSFERS
- 13. CAPITAL ACCOUNT IT IS MADE UP OF CAPITAL TRANSFERS MIGRANTS ASSETS PUBLIC SERVICE SUPERANNUATION BENEFITS’ DEBT FORGIVENESS AND INHERITANCE FUNDS INTANGIBLE ASSETS IPR PATENTS
- 14. THE FINANCIAL ACCOUNT RECORDs Canada’s financial transactions with foreign countries including short term and long term movements of capital There are two types of capital movements Direct investments in the ownership or control of a business Portfolio investments which are purchases of company stocks and bonds both public and private
- 15. Statistical discrepancy(errors and omissions) The double entry book keeping principle states that for every credit, there is a corresponding debit and therefore, there should be a balance in BOP as well. In reality BOP may not balance because of errors and omissions Errors may be due to statistical discrepanices and omissions may be due to certain transactions may not get recorded.
- 16. Foreign exchange reserves The balance of foreign exchange reserve is the combined effect of current and capital account balances. The reserves will increase when: The surplus capital a/c is more than the deficit in current a/c The surplus in current a/c is more than deficit in capital a/c Both the current a/c and capital a/c shows a surplus In 2009-10 India's FER increased by 13.4 usd billion
- 17. Bop always balances due to the following Goods, services and resources traded internationally are paid for; thus every movement of products is offset by a balancing movement of money or some other financial asset surplus in the current a/c is offset by a deficit in the capital a/c. A deficit in the current a/c must be offset by a surplus in the capital a/c
- 18. Equilibrium in bops Bop is the difference between the receipts from and payments to foreigners by residents of a country Bop must always balance Debits must be equal to credits So there will be equilibrium in bop Symbolically, b=r-p When b=0, there will be equilibrium in bops When b is positive = favourable bops When b is negative= unfavourable bops
- 19. Types of equilibrium Static equilibrium: here, exports equal imports including exports and imports of services as well as goods and other items on the bops, short term capital, long term capital and monetary gold are on balance zero. National money incomes should be in equilibrium vis-à-vis money incomes abroad. The foreign exchange rate must be in equilibrium Dynamic equilibrium: in the longrun the exports and imports differ by the amount of long term autonomous capital movements made in a normal direction
- 20. Types of Disequilibrium in BOP Structural disequilibrium Structural disequilibrium at goods level Strucutural disequilibrium at factors level Cyclical disequilibrium Short run disequilibrium Long run disequilibrium Monetary disequilibrium Exchange rate fluctuations
- 21. Causes of disequilibrium in BOP- Economic, Political and Social Causes Import related causes Population growth Development program Imports of essential items Reduction of import duties Inflation Demonstration effect Export related causes Increase in population Inflation Appreciation of currency Discovery of substitutes Technological development Protecctionist trade policy
- 22. Other causes Flight of capital Globalisation Cyclical transmission Structural adjustments Political factors
- 23. Measures to correct disequilibrium in BOP I. Monetary meausres 1. monetary policy Inflation deflation 2. Fiscal policy Inflation deflation 3. Exchange rate policy Devaluation depreciation II. Non-monetary /General measures Tariffs Quotas Export promotion Import sustitution
- 24. Causes of disequilibrium in the BOP in India Revenue oriented tariffs Adverse terms of trade Import substitution policy of India Export of primary commodities Capital account problem Trade restrictions of developed countries Inflation Ever increasing demand for imports
- 25. Reasons for Poor performance of India’s export trade I. export related problems HIGH prices Poor quality Poor negotiation skills Inadequate promotion Poor follow up of sales II. General causes Good domestic market Number of formalities Problem of trading blocks Negative attitude Poor infrasctructure
- 26. Methods of correcting disequilibrium Exchange depreciation (price effect) or devaluation(by government) Deflate the currency Tariffs Import quotas and Export duties