MEANING BALANCE

OF PAYMENT
OF ALL THE

THE BALANCE OF PAYMENT IS A SUMMARY INTERNATIONAL TRANSACTIONS OF A COUNTRY

AND ITS CITIZENS DURING A

SPECIFIED PERIOD OF TIME.

ACCORDING JOHNSON,

DEFINITION THE
AND

TO

HARVEY BALANCE

AND OF

PAYMENTS ACCOUNTS FOR A COUNTRY SET OUT, IN SUMMARY FORM, ALL THE CURRENT CAPITAL

TRANSACTIONS WHICH HAVE TAKEN PLACE BETWEEN THE RESIDENTS OF THAT COUNTRY AND THE REST OF THE WORLD IN A GIVEN PERIOD OF TIME.

IN THE WORDS OF PETERSON, A NATIONS INTERNATIONAL ECONOMIC BALANCE INVOLVES ALL THE INTERNATIONAL ECONOMIC

TRANSACTIONS THAT RESIDENTS OF ONE NATIONS ENTER INTO WITH THE RESIDENTS OF ALL OTHER NATIONS OF THE WORLD DURING SOME SPECIFIC

IT MAY BE DEFINED IN A STATISTICAL SENSE AS AN ITEMIZED ACCOUNT OF

TRANSACTIONS

INVOLVING

RECEIPTS

FROM FOREIGNERS, ON THE ONE HAND,

AND PAYMENTS TO FOREIGNERS, ON THE

OTHER. SINCE THE FORMER RELATE TO THE INTERNATIONAL INCOME OF A COUNTRY, THEY ARE CALLED CREDIT, AND SINCE THE LATTER HAVE TO OUTGO,

B=R-P
HERE, B DENOTES THE BALANCE OF PAYMENTS; R DENOTES TOTAL RECEIPTS AND P REPRESENT TOTAL PAYMENTS. BOTH TOTAL RECEIPTS AND PAYMENTS CAN BE

SUBDIVIDED INTO DOMESTIC AND FOREIGN

RECEIPTS AND PAYMENTS.

ASSUMING

THAT

DOMESTIC

RECEIPTS

AND

DOMESTIC

PAYMENTS ARE EQUAL, THE

BALANCE OF PATYMENTS CAN

BE STATED ASB=Rf-Pf

IF

Rf>Pf,

THERE

WILL

BE

BALANCE

OF

PAYMENTS

SURPLUS. IF Rf<Pf, IT DENOTES A

DEFICIT

IN

INTERNATIONAL
AN EQUALITY

PATYMENTS.

BETWEEN
PAYMENTS

RECEIPTS
(Rf=Pf)

AND

SIGNIFIES

COMPONENTS
THE USA BALANCE OF PAYMENTS ACCOUNT CONSIST OF THREE ACCOUNTS1. 2. 3.

THE CURRENT ACCOUNT THE CAPITAL ACCOUNT THE ACCOUNT OF FINANCING OF DEFICIT OR SURPLUS.

THE CURRENT ACCOUNT

THIS SECTION OF THE BALANCE OF PAYMENTS RECORDS ALL CURRENT TRANSACTIONS WHICH INVOLVE EITHER THE EXPORT OR IMPORT OF GOODS AND SERVICES. THE GOODS EXPORTED ARE TERMED AS VISIBLE EXPORTS.

THE SERVICES PERFORMED FOR THE

PEOPLE OF OTHER COUNTRIES ON THE

OTHER HAND, ARE CALLED AS THE

EXAMPLE
1.SHIPPING,

2.BANKING AND INSURANCE, 3.EXPENDITURE ON DIPLOMATIC SERVICES, 4.TOURIST EXPENDITURE, 5.INTEREST, 6.PROFITS AND DIVIDENDS FROM OVERSEAS INVESTMENT.

CAPITAL ACCOUNT
THE CAPITAL ACCOUNT INCLUDES ALL TRANSACTIONS INVOLVING THE LENDING OR BORROWINGS OF CAPITAL OF BOTH SHORT AND LONG MATURITIES AND

BASICALLY REFLECTS THE NET CHANGE

DURING THE ACCOUNTING PERIODS IN THE FINANCIAL CLAIMS AND LIABILITIES OF DOMESTIC CITIZENS, BUSINESS FIRMS OR FINANCIAL INSTITUTIONS VIS-A-VIS

THE REST OF THE WORLD.

THE ACCOUNT OF FINANCING OF SURPLUS OR DEFICIT

THE DEFICIT ON CURRENT ACCOUNT, APART FROM THE SHORT OR LONG TERM CAPITAL MOVEMENTS, MAY BE

ADJUSTED THROUGH THE TRANSACTIONS INVOLVING THE

SALE OF GOLD. SINCE GOLD IS UNIVERSALLY ACCEPTED BY THE NATIONS IN THE SETTELEMRNT OF BALANCES, THE

GOLD SELLING TO EXPORTING COUNTRIES CAN OBTAIN THE

NECESSARY AMOUNT OF FOREIGN EXCHANGE FOR

DISCHARGING THEIR FOREIGN LIABILITIES. THE DEFICIT MAY

ALSO BE COVERED BY THE DOMESTIC ECONOMY EITHER BY

DRAWING ON THE RESERVES, OR BY BORROWING FROM THE I.M.F. OR OTHER SOURCES ABROAD.

THE MAIN ITEMS IN CASE OF USA BOP ACCOUNT

CURRENT ACCOUNT: I. MERCHANDISE TRADE BALANCE II. EXPORTS III. IMPORTANTS IV. OTHER SERVICES V. BALANCE ON GOODS AND SERVICES ( 1+4+5) VI. UNILATERAL TRANSFER- PRIVATE AND GOVERNMENT. VII. BALANCE OF CURRENT ACCOUNT (6+7)
A.

I. II. III. IV. V. VI. VII.

B. CAPITAL ACCOUNT . US DIRECET INVESTMENT ABROAD FOREIGN DIRECT INVESTMENT IN THE USA US NET PURCHASES (-) OF FOREIGN SECURITIES FOREIGN NET PURCHASES (+) OF US SECURITIES. BANK REPORTED CLAIMS ON FOREIGNERS AND OTHERS. BALANCE ON CAPITAL ACCOUNT (9+10+11+12+13+14) STATISTICAL DISCREPENCY

C. BALANCING ITEMS:
I.

FOREIGN OFFICIALS ASSETS IN THE

USA.
II.

USA OFFICIALS RESERVE ASSESTS.

III.

USA GOVERNMENT ASSETS OTHER

THAN OFFICIALS RESERVE ASSETS.

IV.

OVERALL BALANCE

THE MAIN ITEMS IN CASE OF INDIAS BOP ACCOUNT A. CURRENT ACCOUNT:

MERCHANDISE. II. NON-MONETARY GOLD MOVEMENT III. TRAVEL IV. TRANSPORTATION V. INSURANCE VI. INVESTMENT INCOME VII. MISCELLANEOUS VIII. TRANSFER PAYMENTS IX. TOTAL CURRENT TRANSACTIONS
I.

B. CAPITAL ACCOUNT
.
I.

PRIVATE

II.

BANKING
OFFICIAL

III.

DIFFERENCE BETWEEN BOP & BOT

THE

BALANCE

OF

TRADE

IS

THE

DIFFERENCE BETWEEN THE EXPORTS AND

IMPORTS OF COMMODITIES ALONE.

ON THE OTHERHAND THE BOP, REFERS TO THE TOTAL CREDITS AND DEBITS ON ACCOUNT OF ALL THE COMMODITIES AND SERVICES THAT THE DOMESTIC ECONOMY RECEIVES FROM THE REST OF THE WORLD

WHY BOP IS TERMED AS ECONOMIC BAROMETOR OF A COUNTRIES ECONOMIC LIFE ?

BOP REVEALS TO THE GOVERNMENT THE TRUE INTERNATIONAL ECONOMIC POSITION OF THE COUNTRY. THE GOVERNMENT, IN THE LIGHT OF THE CHARGES IN CURRENT ACCOUNT, CAPITAL ACCOUNT AND THE ACCOUNT OF FINANCING CAN TAKE APPROPRIATE MONETARY AND FISCAL DECISIONS TO RECTIFY ANY UNDESIRED EFFECT OF PAYMENTS SURPLUS OR DEFICIT ON

IT

IS

ALSO

POSSIBLE
THE

TO

MEASURE
OF THE AND WILL

THROUGH THE CHANGES IN THE PAYMENTS POSITION, LEVEL OF OF INFLUENCE ON INCOME DEFICIT INTERNATIONAL TRASACTIONS

NATIONAL PAYMENTS

EXPENDITURE. IN THE CASE OF LDC, THE BALANCE

SHOW

THE

EXTENT

TO

WHICH
HAS

ITS
TO

DEVELOPMENT

PROGRAMME

DEPEND UPON THE FINANCIAL ASSISTANCE

CAN WE SAY BOP SHOWS DIRECTLY THE PROSPERITY OR POVERTY OF A COUNTRY?

NO.

A BALANCE OF PAYMENTS SURPLUS IS

NOT A SOUND PROOF OF THE

ECONOMIC
PAYMENTS COMPETITIVE COUNTRY.

PROSPERITY
DEFICTS A

OF
SIGN OF

A
OF A

COUNTRY. NOR IS THE BALANCE OF INADEQUACY

. A POOR COUNTRY MAY HAVE A BOP SURPLUS ON ACCOUNT OF A VERY SIZEABLE INFLOW OF FOREIGN LOANS AND EQUITY CAPITAL. SIMILARLY, A DEVELOP COUNTRY LIKE USA MAY HAVE A BOP DEFICIT NOT BECAUSE ITS COMPETITIVE CAPACITY HAS DETERIORATED OR THAT ITS EXPORTS OF VISIABLE AND INVISIBLES HAVE DOWN, BUT BECAUSE THE COUNTRY MIGHT HAVE UNDERTAKEN A MASSIVE ASSISTANCE PROGRAMME FOR THE POVERTY-STRICKEN COUNTRIES OF