Balance of Payments

  • Statement of systematic record of all economic transactions between one country (resident country) and the rest of the world

  • Arise due to flow of goods

  • Flow of services

  • Flow of investment

  • Period of time- usually a year

  • Includes current and capital transaction

Characteristics

  • Way of listing receipts and payments in the international transaction of a country

  • Adopts double entry book-keeping method

  • Two sides debit and credit- payments are recorded on debit side, receipts on credit side

  • Debit and credit of BOP do not balance; balance is achieved by adding item called errors and omissions

  • Contains two sets of accounts

  1. Current account- records real and short term transaction

  2. Capital account- records financial and long-term transaction

Current account

Shows the flow of real income or foreign exchange transactions on account of trade of goods and invisibles

  • Divided into two parts: BOT, Balance of Invisible

  • Balance of Trade account: transaction related to goods (exported & imported) are entered

Also called visible items or merchandise items e.g. export of tea, import of Petroleum

  • BOT – positive

  • Surplus- exports are higher than imports Negative

  • Deficit- imports are higher than exports

  • Balanced- imports and exports are equal

Invisible account

Services

  • Rendered through or received from the rest of the world

  • Includes transactions related to services rendered and received by the residents of nation

    • E.g. Banking & insurance charges, interest on loans, tourism etc.

Unilateral transfers

  • Unlike export & import where goods are flow in one direction and payment flow in other direction

  • Called unilateral transaction because they represent the flow of funds only in one direction

  • Includes

  • Gifts and charity

  • Grants from abroad

  • Pension

  • Remittances

Investment income

  • Includes Interest, dividend, repayment of commercial credits etc.

Non-monetary movement of gold:

  • Monetary sale and purchase- influence monetary reserves

  • Non-monetary sale and purchase of gold- shown in current a/c

Capital Account

Records the flow- inflow/ outflow of capital

  • Shows flow of foreign loans/ investments and banking funds

  • Non- debt creating inflows- FDI, Portfolio investment

  • Debt creating inflows- external assistance, external commercial borrowing, short term credits, NRI deposits

  • Required to settle surplus or deficit of current account

  • It takes place in two ways:

  1. Capital A/c receipts

  2. Capital A/c payments

  • It includes private balances, balance held on govt. a/c, assistant by international institutional agencies and specie flow

    • Two accounts- current and capital necessarily balance in BOP.

    • Surplus of current a/c must be equal to the deficit in the capital account or vice-versa.

    • Balanced through adding errors and omissions

  • Balance of trade and balance of payments

  • BO trade refers to exports and imports only

  • Balance of trade= exports of goods- imports of goods

  • BOP includes BOT, services, buying and selling of gold, capital flows etc. (invisible)

  • BOT- visible item

  • BOP- both visible and invisible

BOP Summary

BOP Summary

BOP Summary

  • Equilibrium & disequilibrium of balance of payment

  • Types of disequilibrium in BOP

    • Cyclical disequilibrium:

      • Occurs on account of trade cycle

    • Structural disequilibrium

    • Short run disequilibrium

    • Long run disequilibrium

  • Causes of disequilibrium

For details refer

Watch video lecture on YouTube: Viddeo Tutorial on Balance of Payments

Youtube Video Tutorial on Balance of Payments