this presentation is based on IGNOU's M.com first year subject international business finance . in this presentation I have discussed all the essentials of International transactions and balance of payment . this presentation is very helpful for students who is appearing in M.Com or MBA finance course.
explain about techniques for hedging transaction exposure, how to used hedge future, option, money market for payable and receivable, comparing techniques for hedging vs not-hedging
presentation slides on international funds flow prepared by the group members in a new way thanks guys for providing such a beneficial, knowledgeable slides.
explain about techniques for hedging transaction exposure, how to used hedge future, option, money market for payable and receivable, comparing techniques for hedging vs not-hedging
presentation slides on international funds flow prepared by the group members in a new way thanks guys for providing such a beneficial, knowledgeable slides.
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this chapter we are going to explain key, components of the BoP, and explain how the international flow of funds is influenced by economic factors and other factors
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here we are trying to explain how firms can benefit from forecasting exchange rate, to describe common technique that used to forecast, how to evaluate forecasting performance
describing the exchange rate systems, explaining how government uses direct and indirect intervention to influence exchange rates, and how government intervention in the forex markets.
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2. Block – 1
Unit - 4
International Transactions and
Balance of Payments
International Business
Finance
3. Topics to be covered
• Topics to be covered
• Introduction
• Balance of Payments Concept
• Nature of International Transactions
• The Balance of Payments Statement
• The Balance of Indebtedness
• Adjustment Policies
• Rise of Market Power
• Summary
JASWANT SEN (UGC-NET) 92-7879-4057
4. Balance of Payments
• The balance of payments, also known
as BoP.
• BoP of a country is the record of all
economic transactions between the
residents of the country and the rest of
the world in a particular period (over a
quarter of a year or more commonly
over a year)
JASWANT SEN (UGC-NET) 92-7879-4057
5. • The balance of payments comprise
three types of financial flows. First, the
value of visible exports can be
balanced against the value of visible
imports to determine trade balance.
Trade in merchandise represents these
visible items like grain, oil, jewellery,
garments and
JASWANT SEN (UGC-NET) 92-7879-4057
8. Balance of Payments (Cont..)
• Current Account:-
• The current account of the BoP provides
information not only on international trade
in goods, but also on international
transactions in services. Current account
transactions can be classified into
• merchandise (exports and imports) and
• invisibles.
JASWANT SEN (UGC-NET) 92-7879-4057
9. Balance of Payments (Cont..)
• Balance of Trade = balance of visible
export and import
• Trade in merchandise represents
these visible items like grain, oil,
jewellery, garments
• Balance of Invisibles = balance of
invisibles’ export and import
JASWANT SEN (UGC-NET) 92-7879-4057
10. Balance of Payments (Cont..)
• Thirdly, the balance of payment
consists of balance of investment and
other capital flows, called capital
account balance.
• Official reserve account
• If the sum current account and capital
account is not zero then the government
must take action by adjusting the official
reserve account to balance BOP
JASWANT SEN (UGC-NET) 92-7879-4057
11. Balance of Payments (Cont..)
• In effect, BOP signify supply and
demand of foreign currency (say, US
dollar, British pound sterling or
Japanese yen). The supply is
generated, in the normal course,
through (visible and invisible) exports
and capital inflows, while demand
JASWANT SEN (UGC-NET) 92-7879-4057
12. Nature Of International Transactions
• Central bank (or other foreign exchange
agencies) of two countries tend to settle their
accounts only in aggregates and not for each
individual transaction in isolation. Moreover, in
the absence of a perfectly free multilateral
trading system, even a country with an overall
surplus in its balance of payments may fall short
of a particular foreign currency. For example, if
(imagine that) India has a surplus BOP with
Russia (and also an overall surplus globally),she
(India) may still fail to get enough imports from
the USA (on monetary basis) if Russian rouble
is not freely convertible into US dollar.
JASWANT SEN (UGC-NET) 92-7879-4057
13. The Balance of Payments Statement
• Double-entry book-keeping is the basic
tenet behind the balance of payments
statement.
• Every transaction gets recorded as a
credit on one side and as an offsetting
debit on the other side.
JASWANT SEN (UGC-NET) 92-7879-4057
14. The Balance of Payments Statement
(Cont..)
• The transactions may be categorized
as current account transaction and
capital account transactions.
• Main factors of capital account
transactions are
• Foreign direct investment
• Portfolio investment
• Short term Investment
JASWANT SEN (UGC-NET) 92-7879-4057
15. India's Balance of Payment Position
• India had an adverse trade balance
(visible) in 1993-94 (the usual story
between 1949-50 and 1997-98 with the
precarious exception of two years, 1972-
73 and 1976-97). The invisible balance in
1993-94 was unfavourable. But taking
into account both visible and invisibles
there was a current account deficit. In the
capital account inflows were more than
twice the outflows resulting in a very
substantial surplus.
JASWANT SEN (UGC-NET) 92-7879-4057
16. India's Balance of Payment
Position (Cont..)
• The international trading and financial
situation remained very unfavourable
since the economic and financial crisis of
East Asia in July 1997. All over the world,
developing countries have been
experiencing significant pressures on the
balance of payments.
• Despite this, India's balance of payments
remained comfortable in both 1998-99
and 1999-2000 partly due to anticipatory
policy actions, such as issue of Resurgent
India Bonds on 5th August ,1998.
JASWANT SEN (UGC-NET) 92-7879-4057
17. The Balance Of Indebtedness
• It is a concept used to measure and assess the
burden of external debt for a country.
• The total debt liabilities of a-debtor nation are
measured by 'debt stock’ or 'debt outstanding
and disbursed'.
• As a measure of the balance of indebtedness,
the term 'net flows' stands for disbursements
minus Principal repayments. If an indebted
country is still having net inflows, it means that
new financing is more than the (old) debt
retired, so that the total quantum of debt is
going up.
JASWANT SEN (UGC-NET) 92-7879-4057
18. The Balance Of Indebtedness
(Cont..)
• India's external debt had continuously risen from
$ 75,857 million in 1989-90 to $ 99,008 in 1994-
95. But, as on March 3 1, 1996, it was lower at $
92,199 million.
• However, the rupee burden in this regard has
increased thereafter on account of the marked
fall in the external value of the Indian rupee
during 1997-98. The ratio of India's external
debt to GNP stood at 33%, and to NNP at 37%,
during 1995-96., (visible) export earnings were
only about one-sixth of the rupee burden of
external debt as on March 31, 1996
(Rs.3,15,435 crore).
JASWANT SEN (UGC-NET) 92-7879-4057
19. Measures used to correct
disequilibrium in Balance of Payments
Devaluation
Deflation
Exchange controls
Trade policy measures
Supportive monetary - fiscal policies.
20. Adjustment Policies to correct disequilibrium
in Balance of Payments
Unilateral
Adjustments
Bilateral
Adjustments
Regional
Adjustments
Multilateral
Adjustments
JASWANT SEN (UGC-NET) 92-7879-4057
21. Adjustment Policies to correct disequilibrium
in Balance of Payments (Cont..)
• Unilateral Adjustments
• Almost every economic measure can be
unilateral, at least on the face of it, such as
fiscal policy, monetary policy, commercial
policy (including exchange rate adjustment),
price policy, wage policy, industrial policy
rural/agricultural policy, as also the approach
toward small scale enterprises and
employment.
• These policy measures have been influenced
by persuasive or even coercive impact of
international agencies like IMF, IBRD, IDA, as
also of affluent nations like the USA.
JASWANT SEN (UGC-NET) 92-7879-4057
22. Adjustment Policies to correct disequilibrium
in Balance of Payments (Cont..)
• Bilateral Adjustments
• Advanced country may make free gifts or
concessional loans by way of aid to a
'(relatively) backward economy.
• Such unilateral (capital) transfers may,
obviously be guided by the need to preserve
or promote cordiality in bilateral relations. In
effect, however, they may perpetuate
economic dependence. A country receiving
"tied aid" may be obliged to buy goods or
services from the donor country even though
it is not the cheapest or best source of supply.
(Cont..)
JASWANT SEN (UGC-NET) 92-7879-4057
23. Adjustment Policies to correct disequilibrium
in Balance of Payments (Cont..)
• Regional Adjustment
• Foreign exchange earnings of some countries
were frozen in Hitler's Germany under the
banner of "blocked accounts". So, the balance
of payments problem was at the top of global
agenda from 1945 onwards. Besides the birth
of multilateral agencies like IMF, regional
cooperation also manifested itself in a big way
through the connotations like common market,
customs union, and free trade area.
cont..
JASWANT SEN (UGC-NET) 92-7879-4057
24. Adjustment Policies to correct disequilibrium
in Balance of Payments (Cont..)
• Regional Adjustment
• The European Union, emanating from the
Treaty of Rome (1957), has been in existence
for more than four decades under a variety of
nomenclatures. When a common currency
(Euro) gets freely circulated amongst
member countries, the foreign exchange
problem might be resolved in a big way. This
gives a cue to the creation of a "Rupee Area"
with India as its nucleus, notwithstanding the
Asian financial crisis of 1997-98.
JASWANT SEN (UGC-NET) 92-7879-4057
25. Adjustment Policies to correct disequilibrium
in Balance of Payments (Cont..)
• Multilateral Adjustments
• For the world as a whole, free multilateral convertibility
of all currencies would be an effective solution of BOP
difficulties. The IMF and other multilateral agencies
have strived towards this end since 1945. The quarter
century following the appearance of GATT (1948) can
be looked upon as the golden age of global trade.
However, the WTO accord, which became operational
in 1995, seems to have shifted the focus from trade to
investment, intellectual property rights (patents in
particular), social clauses (like child labour and human
rights), and adjudication of complaints/ disputes (over
100 during the first three years 1995, 1996 and 1997)
JASWANT SEN (UGC-NET) 92-7879-4057
26. Rise of Market Power
• The daily average of trading volume on
foreign exchanges (global figure) was $1.19
trillion as against $0.26 trillion a decade back
(1986) and only $0.01 trillion about a quarter
century back (1973)
• Biggest foreign exchange markets
• London ($464 billion for 1995)
• New York ($244 billion) and
• Tokyo ($161 billion).
JASWANT SEN (UGC-NET) 92-7879-4057
27. Rise of Market Power
• The power of the market progress,
particularly, speculations have been on
the rise. The powers of people like
George Soros, with US $400 3 billion
under his hand, are immense. The power
of the central banks of quite a few
countries having foreign exchange
reserves, all put together, much lower
than US $400 billion, shows the limits of
the government to government
adjustments.
JASWANT SEN (UGC-NET) 92-7879-4057
28. Summary
• Summary of the Unit
• The balance of payments is arrived at after
taking into account capital account items
also.
• Double-entry book-keeping is the basic
tenet behind the BOP statement.
• Adjustment policies for ameliorating the BOP
position may be unilateral, bilateral,
regional or multilateral in character.
JASWANT SEN (UGC-NET) 92-7879-4057
29. Summary (Cont..)
• The IMF and other multilateral agencies have
strived towards this end since 1945.
• The quarter century following the appearance of
GATT (1948) can be looked upon as the golden
age of global trade.
• However, the WTO accord, which became
operational in 1995, seems to have shifted the
focus from trade to investment, intellectual property
rights (patents in particular), social clauses (like
child labour and human rights), and adjudication of
complaints/ disputes (over 100 during the first three
years 1995, 1996 and 1997)
JASWANT SEN (UGC-NET) 92-7879-4057
