A Balance of Payment account is a statement of double entry system of record of all economic transactions (involving

foreign payments) between residents of a country and the rest of the world carried out in specific period of time.

Purpose of BOP

○ Provides data for economic analysis

○ Reveals changes in the composition & magnitude of foreign trade
○ Provides indications of future repercussions of country’s past trade performances
○ Reveals the weak and strong points of a country’s foreign trade relations

Terminologies

○ Favorable Balance Of Payments – Value of total receipts more than total payments
○ Adverse Balance Of Payments – Value of total receipts less than total payments
○ Balanced Balance Of Payments – Value of total receipts equals total payments
○ Unrequited receipts – Receipts for which nothing has to be paid in return.
○ Unrequited payments – Payments for which nothing is received in return.

Balance of Trade

Definition: Difference between value of exports and imports of visible items only

BOT BOP

○ Records only merchandise transactions
○ Does not record transactions of capital nature
○ A part of current account of BOP
○ Records transactions relating to both goods and
services
○ Records transaction of capital nature
○ Includes BOT , Balance of services , Balance Of
Unrequited Transfers and Balance Of Capital
Transactions.

CURRENT ACCOUNT

○ All transactions relating to goods, services and unrequited transfers constitute current account
○ Flow of items pertaining to specific period of time
○ Visible items include goods
○ Invisible items include services

Structure of current account

Transactions Credit Debit Net Balance

1. Merchandise Export Import -

2. Foreign Travel Earning Payment -

3. Transportation Earning Payment -

4. Insurance (Premium) Receipt Payment -

5. Investment Income Dividend Receipt Dividend Payment -

6.Government (purchase of Receipt Payment -
goods & services)

CURRENT A/C Balance - - Surplus

(+)Deficit (-)

CAPITAL ACCOUNT

○ All transactions indicating changes in stock magnitudes concerning capital receipts and payments constitute capital
account
○ Relates to
– Borrowing
– Capital repayment
– Sale of assets
– Change in stock of gold
– Change in reserve of foreign currency

Short term capital movement includes:

○ Purchase of short term securities

○ Speculative purchase of foreign currency
○ Cash balances held by foreigners
○ Net balance of current account

Long term capital movement includes:

○ Investments in shares, bonds, physical assets etc.

○ Amortization of capital

Difference between current account and capital account

CURRENT ACCOUNT CAPITAL ACCOUNT

○ Indicates flow aspect of country’s national ○ Indicates changes in stock magnitudes

transactions ○ Relates to all transactions constituting debts
○ Relates to goods , services and unrequited and transfer of ownership
transfers

STRUCTURE OF BALANCE OF PAYMENTS ACCOUNT

CREDITS DEBITS

Current A/c: Current A/c:

○ Exports of goods(Visible items) ○ Imports of goods(Visible items)

○ Exports of services (Invisibles) ○ Imports of services(Invisibles)
○ Unrequited receipts(gifts , remittances, ○ Unrequited payments( gifts, remittance, indemnities etc.
indemnities, etc. form foreigners) to foreigners)

Capital A/c: Capital A/c:

○ Capital receipts (Borrowings from ○ Capital payments (lending to , capital repayments to

abroad, capital repayments by, or sale of , or purchase of assets from foreigners, reduction in
assets to foreigners, increase in stock of stock of gold and reserves of foreign currency etc.)
gold and reserves of foreign currency
etc.)

EQUILIBRIUM IN BOP ACCOUNTS

Total receipts equals total payments arising out of transfer of

○ Goods and services

○ Other transactions

These transactions are classified as:-

○ Autonomous transactions
○ Induced transactions or Accommodating capital flows

○ In the current account autonomous transactions are the export and import of goods and services

○ When export is not equal to import, short run capital movements such as international borrowing and lending
take place, which are called induced or accommodating transactions

○ In the capital account the export and import of long term capital are autonomous transactions

○ The short term capital movements viz. gold movements and accommodating capital movements on account of
autonomous transactions are induced transactions.

Disequilibrium

○ Total receipts and total payments inequality shows disequilibrium of balance of payments account
○ Total receipt and payment arising from autonomous transactions determine the deficit or surplus in the balance
of payments
○ If payments>receipts, BOP shows Deficit
○ If payments<receipts, BOP shows Surplus

Causes of disequilibrium

○ Increase in imports
○ Slow progress in exports
○ Burden of interest payments
○ International developments
 ○ Deficit in capital account

Corrective Measures

○ Devaluation
○ Export promotion
○ Import restrictions
○ Import substitution
○ Government intervention
○ Supply of credit
○ Special treatment to NRIs
○ Announcement of trade policies
○ Foreign aid
○ Improvements in production efficiency

BOP Adjustments

A. INDIRECT MEASURES
1. Income measures
○ Fiscal Policy
○ Monetary Policy
1. Price measures
A. DIRECT MEASURE
○ Exchange control

Variations in India’s deficit position

○ 1991-1995:- Equal growth of exports & imports

○ 1995-1999:- Growth of imports& stagnation of exports(widening of trade deficits)
○ 1999-2000:- Exports recovered while imports surged(continued rise in trade deficits)
○ 2000-2001:- Rise in exports &stagnation of imports(normal level of trade deficit)

India’s current BOP position

○ Remained comfortable during 2007-08

○ Increase in net inflows by FIIs
○ Increase in FDI inflows
○ Increase in net surplus