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
- 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
- Cyclical disequilibrium:
- Causes of disequilibrium
For details refer Youtube Video Tutorial on Balance of Payments