This document discusses India's balance of payments. It begins by defining the balance of payments as a systematic record of all economic transactions between residents of a country and the rest of the world. It then explains the importance of the balance of payments for understanding currency demand and supply, exchange rates, and monetary policy shifts. The document outlines the key components of a balance of payments statement, including the current account, capital account, and errors and omissions. It also discusses accounting treatments for balance of payments surpluses and deficits and the effects of disequilibriums on the economy. In less than 3 sentences.

1. Assignment on
Unit – 5
Macro Economics and policy
BALANCE OF
PAYMENT
Submitted to :
Dr. Y. C. Zala
Principle & Dean
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Submitted by :
sondarva yagnesh m
Reg. no. 04-2664-2015
M.Sc. (Agri.) 1st
Sem.

2. BALANCE OF PAYMENTSBALANCE OF PAYMENTS
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3. Contents
1.Explaination of the balance of payments.
2.Distinguish between the current account and capital account.
3.Causes and consequences of balance of payments
disequilibrium.
4.Policy measures for correcting balance of payments
disequilibrium.
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4. BALANCE OF PAYMENT:
 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. It presents a classified record of all
receipts on account of goods exported, services
rendered and capital received by residents and
payments made by theme on account of goods
imported and services received from the capital
transferred to non-residents or foreigners.
- Reserve Bank of India

5. IMPORTANCE OF THE BALANCE OF
PAYMENTS
 BOP records all the transactions that create demand for and
supply of a currency. This indicates demand-supply equation of the
currency. This can drive changes in exchange rate of the currency
with other currencies.
 BOP may confirm trend in economy’s international trade and
exchange rate of the currency. This may also indicate change or
reversal in the trend.
 This may indicate policy shift of the monetary authority (RBI) of the
country.
 BOP may confirm trend in economy’s international trade and
exchange rate of the currency. This may also indicate change or
reversal in the trend.
 This may indicate policy shift of the monetary authority (RBI) of the
country

6. The General Rule in BOP
Accounting
a) If a transaction earns foreign
currency for the nation, it is a credit
and is recorded as a plus item.
b) If a transaction involves spending
of foreign currency it is a debit and is
recorded as a negative item.

7. The various components of
a BOP statement
 A. Current Account
 B. Capital Account
 C. IMF
 D. SDR Allocation
 E. Errors & Omissions
 F. Reserves and Monetary Gold

8. Balance of Payments
 TheThe balance of paymentsbalance of payments is a record of allis a record of all
economic transactions conducted betweeneconomic transactions conducted between
a country and the rest of the world for aa country and the rest of the world for a
given time period, usually one year.given time period, usually one year.
 An economic transaction is an exchange of
value. It involves a receipt and a payment
of money in exchange for economic goods
and services.

9. Accounting Treatment of Items
 In standard accounting double entry book-keeping,
each transaction will result in a debit and a credit entry
of equal size or amount.
 Thus in that sense, a country’s balance of payments
accounts for any given year always balances.
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10. Accounting Treatment of
Items
 In terms of actual receipts and payments, a country may
be faced in any given year with one of two situations.
(a) A surplus or favourable balance on the BOP
accounts.
(b) A deficit or unfavourable balance on the BOP
accounts.
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11. Accounting Treatment of Items
(Debit and Credit Items)
 Any item which gives rise to a sale of foreign
exchange (an inflow) is recorded as a credit
item (+) in the accounts e.g. export of goods
and services
 Any item which gives rise to the purchase of
foreign exchange (an outflow) is recorded as a
debit item (-) in the accounts e.g imports of
goods and services.
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12. The Components of the
BOP Account
 The Balance of Payments Account consists of
two parts:
(i) A current accountcurrent account
(ii) A capitalcapital (and financial) accountaccount
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13. The Components of the
BOP Account
 The Current Account generally comprises two sections:
 (a) Visible balance (balance of visible trade): primarily the
import and export of merchandise or goods)
 (b) Invisible balance (Balance of invisible trade): primarily
the import and export of services.
N.B. The sum of the two balances is referred to as the
balance on the currentbalance on the current accountaccount.
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14. The Components of the
BOP Account
 The Current Account generally comprises four
main items:
 (a) Merchandise Trade Balance
 (b) Services Balance
 (c) Net Property Income Balance
 (d) Current Transfers Balance
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15.  The Capital Account deals primarily with short term and
long term flows/movements of capital, that is, it is
concerned with international loans and investments.
 It may consist of transfer of ownership of a fixed asset; direct
investments, portfolio investments, other investments and
reserve assets
 It must be noted that when the balances of both sections
are added there can be a surplus or a deficit.
 The account must therefore show the treatments of any of
these two situations as well as the item to “balance off” the
account. This is strictly for accounting purposes. All surplus or
deficits must be dealt with.
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16. Sample BOP Accounts 16

17. Sample BOP Accounts
12/26/15
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18. Sample BOP Accounts
12/26/15
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19. Balance of
Payments Disequilibrium
 A deficit or an unfavourable balance exists when
the value of autonomous debit items exceeds
the value of autonomous credit items.
 A surplus or a favourable balance exists when
the value of autonomous credit items exceeds
the value of autonomous debit items.
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20. Affects on the Economy
 Is a nations current account balance, by itself, a good
measure of its economic health?
 NO; there is no law, economic or political, which states
that the current account balance must be positive.
Unlike running a budget deficit in which a person or
institution spends more than it makes, running a deficit
in the current account, simply means a country imports
more than it exports.
 Is a current account surplus and financial account
deficit by itself an indication of economic strength?
 NO, particularly not if the exodus of the financial capital
occurs because there are a few good investment
opportunities in the country.
 Is the net inflow of capital bad?
 . NO, if the capital is being invested in such a way as to
enhance the productive capacity of the country
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21. Do monetary and fiscal policies affect the
exchange rates and BOP components 21
• Monetary Policy: An unanticipated shift to expansionary monetary
policy will lead to more rapid economic growth, accelerated inflation
and lower real interest rates
• BOP effects: Higher income and higher domestic prices stimulate
imports and discourage exports. Lower real rates discourage foreign
and domestic investment at home.
• Exchange rate effects : The adverse impact of the country’s current
account will increase the supply of currency in the fx markets;
causing the currency to depreciate. The adverse impact of the
country’s financial account will decrease demand for the country’s
currency, causing it to depreciate.

22. Do monetary and fiscal policies affect the
exchange rates and BOP components?
 Fiscal Policy: An unanticipated shift to more expansive fiscal
policy will result in budget deficits, increase in aggregate
demand, inflation and an increase in real interest rates.
 BOP effect: Increase demand will encourage imports &
discourage exports, which moves the current account towards
deficit.
Meanwhile, the higher interest rates attract foreign investment and
discourage domestic investment from leaving the country,
moving the financial account surplus.
 Exchange rate effects: The adverse impact of the current
account will increase the SUPPLY of the country’s currency,
causing the currency to depreciate.
 The positive impact of the KA will increase demand causing the
currency to appreciate.
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23. THANK YOU
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