2. Understanding BOP
Kindle Berger
"The balance of payments of a
country is a systematic record of
all economic transactions
between the residents of the
reporting country and residents
of foreign countries during a
given period of time".
The balance of payments
(BOP), also known as balance
of international payments,
summarizes all transactions
that a country's individuals,
companies, and government
bodies complete with
individuals, companies, and
government bodies outside the
country.
“The balance of payments of a
country is a systematic record of
all economic transactions
between the residents of a
country and the rest of the world.
Reserve Bank Of India
3. Features Of
BOP
Systematic record of all economic transactions
Includes all transactions
Relates to a period of time
Has a double-entry book-keeping system
4. Importance Of
BOP
Examine the transaction
Helps the government to analyse
Detects the state of the economy
Judge economic and financial status of a
country in the short-term
Confirms trends in the economy's
international trade and exchange rate of the
currency
5. If a transaction earns foreign currency for the nation, it is a
credit and is recorded as a plus item.
RULE 1
VISIBLE ITEMS
CAPITAL TRANSFER
If a transaction involves spending of foreign currency it is a
debit and is recorded as a negative item
RULE 2
INVISIBLE ITEMS
6. The current account measures a
country's trade balance plus the
effects of net income and direct
payments.
When the activities of a country's
people provide enough income and
savings to fund all their purchases,
business activity, and government
infrastructure spending, then the
current account is in balance.
01
02
03
Merchandise Balance
Services Balance
Unilateral Transfer Balance
Current Account includes 3 balances namely:
1.
2.
3.
Real transactions deal with the actual transfer even
of goods and services that affect the national
income, output and expenditure of the country.
Current Account consists of real and short term
transactions. It contains receipts and payments on
account of exports of all types of visible and invisible
items along with unilateral transfers.
CURRENT ACCOUNT
7. The capital account measures
financial transactions that don't affect
a country's income, production, or
savings.
For example: it records international
transfers of drilling rights,
trademarks, and copyrights.
01
Many capital account transactions rarely happen, such as
cross-border insurance payments. The capital account is
the smallest component of the balance of payments
02
03
Capital account consists of its transactions in financial
assets in the form of short-term lending and borrowings
and private and official investments.
It refers to the inflow and outflow of capital, an account of
capital transactions like loans and investments, inflow and
outflow of foreign capital, repayment of past debts, interest
payment on foreign debts etc.
CAPITAL ACCOUNT
8. It is a part of a capital account.
It measures the changes in a nation’s
liquid and non-liquid liabilities to
foreign official holders and the
change in a nation’s official reserve
assets during the year.
01
02
The IMF account contains purchases (credits)
and repurchase (debits) from the International
Monetary Fund.
Special Drawing Rights (SDRs) can be used to
settle international payments between monetary
authorities of two different countries.
Three accounts: IMF, SDR, & Reserve and
Monetary Gold (collectively called as The Reserve
Account)
It includes its gold stock, changes in the official
foreign exchange holdings, SDR holdings of the
government and similar other capital transactions.
etc. are some of the other items of credit and
payments are the debit items.
RESERVE ACCOUNT
20. Conclusion
India’s balance of payments (BoP) in the first half of 2019-20 has improved on the back of higher
Foreign Direct Investment (FDI), portfolio flows and external commercial borrowings and a
narrowing current account deficit (CAD); but dwindling exports and a decline in non-POL
(petroleum, oil, lubricants), non-gold imports as a proportion of GDP spells possible trouble.
The Economic Survey 2019-20 expressed satisfaction that India’s external sector has gained further
stability in the first half of 2019-20, with an improvement in Balance of Payments (BoP) position,
anchored by capital flows through FDI, FPI and ECBs; receipt of robust remittances and contraction
of CAD.
While 2020 saw India economy facing a sharp blow in the April-June quarter, the Indian economy is
certainly recovering at a faster pace. Most high-frequency indicators are looking positive although at
a slightly slower pace than in recent months and easy financial conditions, unlocking of the
economy and recent Government measures are likely to lead to better 2021.
