The document discusses balance of payments and deficit financing. It defines balance of payments as the record of all economic transactions between residents of a country and the rest of the world in a particular period. It includes transactions in visible items, invisible items, and capital transfers. It also describes the components of balance of payments including the current account, capital account, official reserve account, and unilateral transfer account. The document then discusses causes of unfavorable balance of payments and reasons for and effects of deficit financing.

5. Today all the countries are interdependent on each
other. So, each country has got to enter economic
transactions with other countries of the world. There
have been many transactions taken place among the
different countries.
Balance of payment of a country is the record of all
economic transactions between residents of the
country and the rest of the world in a particular
period.

6. Individuals Firms Government

7. 1. Visible items transactions: It include all types of physical goods
exported and imported.
2. Invisible items transactions: It include all types of export and
import of services, workers and remittances.
3. Capital transfer transactions: It is related with capital receipts
and capital payments like investment by one nation in other nation.

10. Balance of
Payments
Current
Account
Capital
Account
Official
Reserve
Account
Unilateral
Transfer
Account

11. Current Account
Current account records the trade transactions and
income from abroad.
* Current account includes:
● Merchandise (export and import of goods)
● Services
● Net income from investments

12. Capital Account
The capital account records the net change in ownership
of foreign assets.
Capital account deals with financial transactions and
record all such transactions which cause a change
in the assets or liabilities status of the resident of a
country.
It mainly includes foreign investment and external
loans which are related with the financial transfer.

13. Official Reserve
Account
It include all remittance and reserve amount received
and rendered by one country to another country.
These transactions are carried out only by country on
the government.

14. Unilateral Transfer
account
It records the gifts, grants and donation
received and rendered to the rest of the
world.
These are not trading transactions. These
refers to one sided transfer from one country
to the other.

15. Causes of
Unfavourable
Balance of Payment
● Natural Causes
● Impact of Machinery
● Change in Taste and Preferences
● Political Instability
● Economic Causes
● Import of War Equipment
● Less Growth in Export
● Growth of Population

17. Deficit financing is the method of meeting government deficit through
the creation of new money. When government expenditure tends to
exceeds public income, the government may resort to deficit financing
to meet the deficit in the budget.
In Indian terminology, the term “Deficit Financing” denotes that
financial scheme of the government expenditure in which the deficit is
meet by utilizing the cash balance with the reserve bank or by taking
loan from the reserve bank.
In practice, however, the latter system has been favoured by the
government. The government transfer its securities to the reserve bank;
on the strength of these securities the reserve bank is empowered to
print more currency noise which are put into circulation by making
increased payment on behalf of government. This process of deficit
financing obviously implies the creation of money.

18. ● To finance war expenditure
● Remedy for depression
● Economic development
● Mobilization of resources
● Increase in aggregate demand
● For payment of interest
● For granting subsidies

19. When the government resort to deficit financing, it
usually borrows from the Reserve Bank.
● The interest paid to the Reserve Bank actually comes back to the
government in the form of profits.
● Trough deficit financing, resources are used much earlier than
they can be otherwise.
● This technique enables to the Government to get resources without
much opposition.
●The development is accelerated.

20. ● Leads to Inflation
● Adverse Effect on Saving
● Adverse Effect on Investment
● Inequality
● Problem of Balance of Payment
● Increase in Cost of Production
● Change in the Pattern of Investment