Balance of Payment

It is a systematic record of a country,s economic and financial transactions with the rest of the world, over a period of time. It shows the relationship between one countrys total payments to all other countries and its total receipts from them

The IMF publication Balance of Payment Manual describes the concept as

1. Transaction of goods and services and income between an economy and the rest of the world. 2. Changes of ownership and other liabilities on that countrys monetary gold, Special Drawing rights and claim on liabilities to the rest of the world 3. Any entries for the foregoing transactions and changes which are not mutually offsetting.

Features of BoP
1. It is a systematic record of all economic transactions between one country and the rest of the world. 2. It includes all transactions visible as well as invisible. 3. It relates to a period of time. Generally it is an annual statement. 4. It adopts a double-entry book-keeping system. 5. When receipts are equal to payments, the balance of payment is in equilibrium.

Balance of payment and Balance of Trade

BoT refers to the export and import of visible items, i.e., material goods. It is the difference between the value of visible exports and imports.
Visible items are those items which are recorded in the customs returns

BoP, on the other hand, is a more comprehensive concept because it covers visible as well as invisible items

Components of Balance of Payment

1. Current Account
2. Capital Account 3. Unilateral Payment Account 4. Official Reserve Assets Account

Current Account
The current account of BoP includes all transactions which give rise to or use up national income. It relates to real and short term transactions. It contains receipts and payments on account of exports, visible and invisible items. Transactions in the current account are called real transactions because they are concerned with actual transfer of goods and services which affect income and, o/p and expenditure of the country.

Items of Current Account

Merchandise Travel Transportation Insurance Investment income Government transaction Miscellaneous Donations and gifts

Capital Account
It deals with the financial transactions. It includes short term and long term international movements of capital. Gold transactions also form part of the capital account. If a country lends or invests abroad, it is a payment and will be recorded on the debit side. Borrowings from abroad or the foreign investments in the home country are entered on the credit side.

Items of Capital Account

1. Private loans 2. Movements in Banking Capital

Unilateral Transfer Account

It is another term for gifts and includes private remittances, government grants and disaster relief

Official Reserve Account

It represents the holdings by the government or official agencies of the means of payment that are generally accepted for the settlement of international claims.

Balance of Payment Disequilibrium

The BoP of a country is said to be in equilibrium when the demand for foreign exchange is exactly equilivalent to the supply of it. The BoP is regarded as being in disequilibrium when it shows either a surplus or deficit.

Causes of Disequilibrium
1. Economic factors
2. Political factors 3. Sociological factors

Economic factors
1. Development Disequilibrium

2. Cyclical Disequilibrium
3. Secular Disequilibrium 4. Structural Disequilibrium

Political factors

Social factors

Correction of Disequilibrium

A country may not be bothered about a surplus in the BoP but every country strives to remove or at least reduce a BoP deficit

Correcting the BoP

Automatic correction

Deliberate measures

Deliberate measures
1. Monetary measures

2. Trade measures
3. Miscellaneous measures

Monetary measures
Monetary Contraction

Devaluation
Exchange Control

Trade Measures
Export Promotion

Import Control