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BALANACE OF PAYMENT

Presented by:Md Salman Shaukat16 MBAW 29

Isaf Ali16 MBAW 30

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Introduction

BALANCE OF PAYMENT (BOP) are an accounting record of all monetary transactions between a country and the rest of the world . These transactions include payment for the country’s exports and imports of good and services , financial capital and financial transfers.

A country has to deal with other countries in respect of three items :-

VISIBLE ITEMS : It includes all types of physical goods exported and imported .

INVISIBLE ITEM : It includes all those services whose export and import are not visible . eg : transportation services , medical services etc .

CAPITAL TRANSFER : It is concerned with capital receipts and capital payments .

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Definition• According to Kindle Berger, “the balance of

payment of a country is a systematic record of all transactions between the residents of the reporting country and residents of foreign countries during a given period of time .

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FEATURES OF BALANCE OF PAYMENT

It is a systematic record of all economic transactions between one country and the rest of the world .

It includes all transactions visible as well as invisible .

It relates to a time. Generally , it is an annual statement .

It adopts a double-entry book-keeping system . It has two sides credit side and debit side .

Receipts are recorded in credit side and payments are recorded in debit side .

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Importance of BOP It serves as an indicator of the changing international

economic or financial position of a country. It helps in formulation of a country’s monetary, fiscal and

trade policies. It helps in determining the influence of foreign trade &

transactions on the level of national income of a country. It is useful to banks, firms, financial institutions and

individuals which are directly or indirectly involved in international trade and finance.

It is an economic barometer of nation’s progress vis-à-vis rest of the world.

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COMPONENTS OF BALANCE OF PAYMENT (BOP)1. CURRENT ACCOUNT BALANCE :

• BOP on current account is a statement of actual receipts and payments in short period .

• It includes the value of export and imports of both visible and invisible goods . That can either surplus or deficit in current account .

• The current account includes :-export and import of the services , interest ,profits , dividends , and unilateral receipts /payments from/to abroad .

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2.CAPITAL ACCOUNT BALANCE :

• It is difference between the receipts and payments on account of capital account . It refers to all financial transactions .

• The capital account involves inflows and outflows relating to investments , short term borrowings and lending , and medium term to long term borrowing and lending .

• There can be surplus or deficit in the capital account .

• It includes :-private foreign loan flow ,movement in banking capital , official capital transactions , reserves , gold movement etc .

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Equilibrium & Disequilibrium in the Balance of Payments

“Equilibrium is the state of the balance of payments over the relevant time period which makes it possible to sustain an open economy without severe unemployment on a continuing basis”.

Though the credit and debit are written balanced in the balance of payment account, it may not remain balanced always. When debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account. Such an imbalance is called the disequilibrium.

Disequilibrium may take place either in the form of deficit or in the form of surplus.

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Surplus in BOP If total exports are more than total imports.

Payments < Receipts

Deficit in BOP

If total imports are more than total exports.Payments > Receipts

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Causes of Disequilibrium in Balance of Payment

Population Growth Development Programs Demonstration Effect Natural Factors Inflation

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Correcting Disequilibrium in the Balance of Payments:

Monetary Measures

Monetary policy

Fiscal policy

Devaluation

Deflation

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Non- Monetary Measures

Export Promotion

Import Substitutes

Import Control

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BALANCE OF TRADE

The difference between a country's imports and its exports.

Balance of trade is the largest component of a country's balance of payments.

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BoP vs. BoT

1. It is a broad term. 1. It is a narrow term.

2. It includes all transactions related to visible, invisible and capital transfers.

2. It includes only visible items

 3. It is always balances itself. 3. It can be favourable or unfavourable.

4. BOP = Current Account + Capital Account + or - Balancing item ( Errors and omissions)

4. BOT = Net Earning on Export - Net payment for imports.

5. Following are main factors which affect BOP a) Conditions of foreign lenders.b) Economic policy of Govt. c) all the factors of BOT

5. Following are main factors which affect BOTa) cost of productionb) availability of raw materials c) Exchange rate d) Prices of goods manufactured at home

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CURRENT SITUATION OF BOPEXPORTS Exports grew for the second month in a row at $23.51 billion

in October on the back of a good showing by the jewellery and engineering sectors.

Exports registered a healthy 9.59% growth over that recorded in the month of October last year at $21.46 billion.

For the April-October period, exports were down 0.17% in dollar terms at $154.9 billion, as against exports of $155.2 billion over the same period last year, as per data released by the Commerce Ministry.

“Non-petroleum exports in October 2016 are valued at $20.80 billion against $18.92 billion in October 2015, an increase of 9.9 per cent.”

REF: Report issued by Ministry of Finance.

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IMPORTS Imports during the month in question at $33.67 billion, were

8.11% higher than the imports of $31.15 billion in October 2015.

Imports for April-October were worth more than $208 billion, which was a 10.85% fall from over $233 billion worth imports recorded for the same period a year ago.

India’s oil imports during October 2016 were valued at $7.14 billion, which was 3.98% higher than oil imports valued at $6.87 billion in the corresponding period last year.

Non-oil imports in October rose by 9.28% to $26.53 billion, from $24.28 billion in the same month of last year

The trade deficit cumulatively for April-October also declined to $53.16 billion against $78.24 billion in the same period of 2015-16.

REF: Report issued by Ministry of Finance.

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