Balance of Payments

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  • 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
  • Current account- records real and short term transaction
  • 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:
  • Capital A/c receipts
  • 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
  • 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

Youtube Video Tutorial on Balance of Payments

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