components of balance of payment

1. Balance of payments

2. Balance of payments (BoP) is a statement of accounts showing
all monetary (economic transactions ) of a country with the
row during a period of time, generally one year.
These transactions may be made by the individuals , firms and
the government.
Inflow of foreign exchange-
outflow of foreign exchange
Bop accounts record all receipts and payments of foreign
exchange. Receipts are recorded as credit items , payments
are recorded as debit items
Bop account thus prepared , reflect the performance of our
economy in relation to the rest of the world

3. Components of BoP account
Current Account Capital account official reserve
account
Current Account
Current account records receipt and payments of foreign
exchange on account of such transactions which do not impact
asset-liability status of a country in relation to rest of the world
Assests and liabilities (in relation to row) are neither raised nor
reduced
current account transactions do not give rise to ‘future claims’

4. Components
1.export and import of goods /merchandise /visibles
(trade balance/merchandise balance/ balance of trade/ balance of
visibles)
2.Export and import of Services
i) factor services- lead to factor payments or factor income.
factor incomes= coe+ investment income on account of rent ,
interest and profit
ii) Non factor services – all services other than factor services
eg. Insurance and banking
3. current transfers
unilateral transfersmade by way of gifts,grants and remittances

5. Visible vs invisible items
i) Export of computer software
ii) import of LCD screen from japan
iii) banking services to NRI
iv) Export Tea to NRI
v) consultancy services of TCS used by foreign firm

6. Estimation of Balance related to current account
1. Trade Balance/ Merchandise balance
2. Goods and services Balance
3. invisibles balance
4. current account Balance

7. Capital Account
capital account records receipts and payments of such
transactions which cause an impact on asset –liablity of a
country in relation to the row.
Liabilities /assets are either raised or reduced
capital account transactions lead to future claims
note: Export and import of capital goods (plant and machineryI
is NOT included in the capital account . As export and import of
all types of goods(whether comsumer or capital goods ) is
recorded as merchandise / visible trade in the current account of
BoP

8. Components of Capital Account
1. Borrowing
i) External commercial borrowing
ii) External assistance
2. Foreign Investment
i) FII/ portfolio investment
ii) FDI
other components
3. NRI Deposits
4. Banking Capital
5. Short term Trade credit
change in foreign exchange reserves
debit – Increase in foreign ex reserve (- sign)
credit- decrease in foreign ex reserve ( + sign)

9. Current account vs Capital Account
a) purchase of shares of reliance by Microsoft
b) imports of computer spare parts from germany
c) Borrowing from world Bank
d) Repayment of loan by Indian Government taken from Japan
e) Gifts received from a relative In America
f) Purchase of Land in England
g) Shipping service by an Indian company to a foreign Company

10. Error and omissions
It is the balancing item, which reflects the inability to record all
international transactions accurately
Autonomous and Accomodating items
Autonomous items refer to those international economic
transactions , which take place due to some economic motive
such as profit maximisation(above the line items)
Accomodating items refer to the transactions that are
undertaken to cover the gap in the balance of payments, i.e such
transactions are undertaken to cover deficit or surplus in
autonomous transactions

11. Significance of BoP accounts(Data)
1.financial status of the domestic economy
2. NFI from abroad
3. X-A ( a component of AD)
4. Market potential
5. Monetary and fiscal policies
in case greter flow of foreign x (pressure of dd for the
domestic currency, rbi has to account for it in the formulation of
its monetary policy)
in case of poor flow of forex( may point to hard tax laws and
government myst account for it in the formulation of its fiscal
policy)