Content

1. Balance of Payment overview

2 . Features of Balance of Payment
3. Importance of Balance of Payment
4. Type of Balance of Payment
5.Balance Of Payment Structure
6 .Advantages & Disadvantages

Balance of Payment overview

Despite its name, the balance of payments data is not concerned with actual
payments made and received by an economy, but rather with transactions. Since many
international transactions included in the balance of payments do not involve the
payment of money, this figure may differ significantly from net payments made to foreign
entities over a period of time.
Does the balance of payments actually balance? In theory, a current account
deficit would have to be financed by a net inflow in the capital and financial account,
while a current account surplus should correspond to an outflow in the capital
and financial account for a net figure of zero. In actual practice, however, the fact that
data are compiled from multiple sources gives rise to some degree of measurement
error.
Balance of payments and international investment position data are critical in
formulating national and international economic policy. Certain aspects of the balance of
payments data, such as payment imbalances and foreign direct investment, are key
issues that a nations economic policies seek to address.
Economic policies are often targeted at specific objectives that, in turn, impact the
balance of payments. For example, a country may adopt policies specifically designed
to attract foreign investment in a particular sector. Another nation may attempt to keep
its currency at an artificially depressed level to stimulate exports and build up its
currency reserves. The impact of these policies is ultimately captured in the balance of
payments data.

Importance of Balance Of Payment

Given that it reflects all payments and liabilities to foreigners and all payments and
obligations received from foreigners, the balance of payments is one of the major
indicators of a country's status in international trade. It has the potential to influence the
prices of free-floating currencies, because free-floating currencies are affected not only
by political events or government policies but also by the economic events represented
by the BOP. As every country strives to a have a favorable balance of payments, the
trends in, and the position of, the balance of payments will significantly influence the
nature and types of regulation of export and import business in particular.
BOP statistics are regularly compiled, published and are continuously monitored by
companies, banks and government agencies. Often we find a news head line like
"announcement of provisional US balance of payment figures sends the dollar tumbling
down".
Obviously the BOP statement contains useful information for financial decision matters.
In the short run, BOP deficits or surpluses may have an immediate impact on the
exchange rate. Basically BOP records all transactions that create demand for and
supply of a currency and the possible impact on the exchange rate. Further they may
signal a policy shift on the part of the monetary authorities of the country, unilaterally or
in concert with the trading partners. For example a country facing a current account
deficit may raise interest rates to attract short-term capital inflow to prevent depreciation
of its currency. Or it may tighten credit and money supply to make it difficult for domestic
banks and firms to borrow the home currency to make investments abroad. It may force
exporters to realize their export earnings quickly and bring the foreign currency home.
Countries suffering from chronic deficits may find their ratings being downgraded
because the markets interpret the data as evidence that the country may have
difficulties in servicing its debt. Finally BOP accounts are intimately connected with the
overall saving -investment balance in a country's national accounts. Continuing deficits

and surpluses may lead to fiscal and monetary actions designed to correct the balance,
which in turn will affect exchange rates and interest rates in the country.
Therefore BOP accounting serves to highlight a country's competitive strengths and
weaknesses, and helps in achieving balanced economic-growth. It can significantly
affect the economic policies of a government, and the economy itself

Types of Balance of Payment

(a) Current account
The current account measures the flows of goods, services, primary income and
secondary income between residents and non-residents.
The goods and services account records external transactions in goods and services.
The goods account covers principally exports and imports as shown in merchandise
trade statistics, but adjusted for coverage and valuation. For example, one major
adjustment for coverage is the adoption of the change of ownership principle in the
Balance of payment statistical system. Following this principle, goods sent abroad for
processing without a change of ownership are not covered in the goods account. On the
other hand, for goods sold under merchanting, although the goods involved have never
been entered into the economy where the owner resides in, they are recorded in the
goods account of the owners economy given that there has been a change of
ownership of the goods. The goods account values both exports and imports of goods
on the same basis of free-on-board (f.o.b.) from the economy of export, thus providing
symmetrical valuation. While the goods sent abroad for processing without a change of
ownership are not covered in the goods account of an economy, the manufacturing
services performed on these goods by a processor in another processing economy are
covered in its services account. Other services cover a wide range of economic
activities, including transport, travel, insurance and pension, financial services, etc.

The primary income account shows the amounts receivable and payable abroad in
return for providing / obtaining use of labour, financial resources or natural resources to
from non-residents. The concepts and definitions of primary income under the current
account of the balance of payment are the same as those of the external primary
income flows under GNI.
The secondary income account records current transfers between residents and nonresidents. Current transfers are transactions in which real or financial resources that are
likely to be consumed immediately or shortly are provided without the receipt of
equivalent economic values in return. Examples include workers remittances,
donations, official assistance and pensions. Current transfers are unilateral in nature
and are offsetting entries in the balance of payment account for one-sided transactions.
Credit entries in this account reflect offsetting entries to the receipt of aforesaid real and
financial resources from other economies. Conversely, debit entries recorded are offsets
to the provision of such real and financial resources to other economies. Secondary
income, together with primary income, affects gross national disposable income which
has a direct and immediate effect on an economy's pattern of consumption in a
specified period.
which is a standard method used for removing seasonal effect from a data series
statistically. When the quarter-to-quarter changes of the seasonally adjusted data series
are analysed, the trend of current account and its components can be more clearly
discerned. The seasonally adjusted current account series are subject to annual
revision resulting from the re-estimation of the seasonal factors when more new data
become available.
(b) Capital and financial account
The capital account measures external transactions in capital transfers, and the
acquisition and disposal of non-produced, non-financial assets (such as trademarks and
brand names). Examples of capital transfers include forgiveness of debts by creditors,
and cash transfers involving the acquisition or disposal of fixed assets.
The financial account records transactions in financial assets and liabilities between
residents and non-residents. It shows how an economy's external transactions are
financed. Transactions in the financial account are classified by function (i.e. the
purpose of the investment) into direct investment, portfolio investment, financial
derivatives, other investment and reserve assets.
(i) Direct investment
Direct investment refers to external investment in which an investor of an economy
acquires a lasting interest and a significant degree of influence or an effective voice in
the management of an enterprise located in another economy. For statistical purpose,

an effective voice is taken as being equivalent to a holding of 10% or more of the voting
power in an enterprise.
(ii) Portfolio investment
Portfolio investment refers to investment in non-resident equity securities and debt
securities (e.g. bonds and notes, money market instruments), other than that included in
direct investment or reserve assets. Compared with direct investors, portfolio investors
in equity securities and debt securities of non-resident enterprises have no lasting
interest or influence in the management of the enterprises concerned. A holding of less
than 10% of the voting power in an enterprise is regarded as portfolio investment.
(iii) Financial derivatives
Financial derivatives are financial instruments that are linked to a specific financial
instrument or indicator or commodity, and through which specific financial risks can be
traded in financial markets in their own right. Financial derivatives include option-type
contracts (e.g. warrants and options) and forward-type contracts (e.g. futures, interest
rate swaps, currency swaps, forward rate agreements, forward foreign exchange
contracts).
(iv) Other investment
Other investment refers to other financial claims on and liabilities to non-residents that
are not classified as direct investment, portfolio investment, financial derivatives or
reserve assets. Other investment includes non-marketable loans, currency and
deposits, trade credits and advances, and other assets / liabilities.
(v) Reserve assets
Reserve assets are external assets that are readily available to and controlled by the
monetary authority of an economy (which refers to the Hong Kong Monetary Authority in
the case of Hong Kong) for meeting balance of payments financing needs, for
intervention in exchange markets to regulate the currency exchange rate of that
economy, and for other related purposes (such as maintaining confidence in the
currency and the economy, and serving as a basis for foreign borrowing).
The overall Balance of payment balance of Hong Kong is the balance of the set of
transactions in the current account and capital and financial account (except reserve
assets), plus net errors and omissions if any. If an economy receives more foreign
currencies than it pays in its external transactions in goods, services, income and
investment, it has a balance of payment surplus. In other words, a balance of payment
surplus reflects an overall net inflow of funds to an economy from the rest of the world.

Conversely, there will be a balance of payment deficit which is equal to its overall net
outflow of funds.

Advantages

Purchase Power and Ease of Purchase - Credit cards can make it easier to
buy things. If you don't like to carry large amounts of cash with you or if a
company doesn't accept cash purchases (for example most airlines, hotels, and
car rental agencies), putting purchases on a credit card can make buying things
easier.

Protection of Purchases - Credit cards may also offer you additional protection
if something you have bought is lost, damaged, or stolen. Both your credit card
statement (and the credit card company) can vouch for the fact that you have
made a purchase if the original receipt is lost or stolen. In addition, some credit
card companies offer insurance on large purchases.

Building a Credit Line - Having a good credit history is often important, not only
when applying for credit cards, but also when applying for things such as loans,
rental applications, or even some jobs. Having a credit card and using it wisely
(making payments on time and in full each month) will help you build a good
credit history.

Emergencies - Credit cards can also be useful in times of emergency. While you
should avoid spending outside your budget (or money you don't have!),
sometimes emergencies (such as your car breaking down or flood or fire) may
lead to a large purchase (like the need for a rental car or a motel room for several
nights.)

Credit Card Benefits - In addition to the benefits listed above, some credit cards
offer additional benefits, such as discounts from particular stores or companies,
bonuses such as free airline miles or travel discounts, and special insurances
(like travel or life insurance.) While most of these benefits are meant to
encourage you to charge more money on your credit card (remember, credit card
companies start making their money when you can't afford to pay off your
charges!) the benefits are real and can be helpful as long as you remember your
spending limits.

Disadvantages

Blowing Your Budget -- The biggest disadvantage of credit cards is that they
encourage people to spend money that they don't have. Most credit cards do not
require you to pay off your balance each month, so even if you only have $100,
you may be able to spend up to $500 or $1,000 on your credit card. While this
may seem like 'free money' at the time, you will have to pay it off -- and the
longer you wait, the more money you will owe since credit card companies
charge you interest each month on the money you have borrowed.

High Interest Rates and Increased Debt -- Credit card companies charge you
an enormous amount of interest on each balance that you don't pay off at the end
of each month. This is how they make their money and this is how most people in
the United States get into debt Consider this: If you have a $100 in savings, most
banks will give you at the most 2.0 to 2.5% interest on your money over the
course of the year. This means you earn $2.00 - $2.50 a year on your $100
savings. Most credit cards charge you up to 10 times that amount of interest on
balances. This means that if you have $100 balance that you don't pay off, you
will be charged 20-25% interest on that $100. This means that you owe almost
$30 interest (plus the original $100) at the end of the year. A good way to look at
this is in comparison to what you would earn in interest from a bank or owe in
interest to a bank loan: Savings accounts may pay you around 2% interest; if you
have a loan from a bank you may pay them around 10% interest (5 times as
much as you earn off your savings); if you owe money to a credit card company,
you may pay them around 20% interest (10 times as much as you earn off your
savings.)

Credit Card Fraud - Like cash, sometimes credit cards can be stolen. They may
be physically stolen (if you lose your wallet) or someone may steal your credit
card number (from a receipt, over the phone, or from a Web site) and use your
card to rack up debts. The good news is that, unlike cash, if you realize your
credit card or number has been stolen and you report it to your credit card
company immediately, you will not be charged for any purchases that someone
else has made. Even if you don't realize your credit card number has been stolen
(sometimes you might not know until you receive your monthly statement), most

credit card companies don't charge you or only charge a small fee, like $25 or
$50, even if the thief has charged thousands of dollars to your card. There are
several things you can do to prevent credit card fraud:
o If you lose your card or wallet, report it to your credit card company
immediately.
o Don't loan your credit card to anyone and only give out your credit card
information to trusted companies or Web sites.
o Check your statement closely at the end of each month to make sure all
charges are yours.
o You can find out more about protecting your personal information by
visiting our Personal Safety course.
Credit cards can make life easier and be a great tool, but if they aren't used wisely they
can become a huge financial burden. If you do decide to use credit cards, remember
these simple rules:

Keep track of all your purchases.

Don't spend outside your budget.

Pay off your balance on all of your credit cards at the end of each month.

Don't loan your credit or give out your credit card information to anyone but
reliable companies.