BALANCE OF PAYMENTS

AMIT K S BHADAURIA

PGT ECONOMICS

KV AMC FIRST SHIFT

DEFINITION�

• It is a systematic record of all economic transactions between residents of a country and residents of foreign countries.

COMPONENTS OF BALANCE OF PAYMENTS�

• Current Account
• Capital Account
• BOP is maintained using Double entry book keeping system. In this sense it is always balanced.

BALANCE OF CURRENT ACCOUNT

• It is classified as-
• Balance of Visible or Balance of Trade
• Balance of Invisible

BALANCE OF VISIBLE

• It is related to merchandise trade.
• It is related to export and import of goods
• Only which are recorded at ports
• Balance of Trade (BoT) = X –M

BALANCE OF INVISIBLE�

• It is classified as

a) Balance of services

b) Balance of Transfers

• Balance of Services includes export and import of- factor services (Balance of Income) and non-factor services (shipping, tourism, banking)

BALANCE OF TRANSFER�

• It includes transfers from and to abroad
• It includes gifts and remittances

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BALANCE OF CURRENT ACCOUNT

Balance of Current Account = Balance of Trade

+ Balance of Income

+ Balance of Non-

factor services

+ Balance of Transfers

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BALANCE OF CAPITAL ACCOUNT�

• While Current account records transactions which leads to actual transfer of assets, Capital account records those which records change in ownership.
• It includes sale and purchase of real asset and monetary assets (shares) etc.
• In this case assets actually do not move, only ownership changes. If however, assets move from one place to another then it will be classified under current account.

COMPONENTS OF CAPITAL ACCOUNT�

• Borrowings:
• External commercial borrowings- These are done at prevailing market rates.
• External Assistance- It is recovered at concessional market rate.

COMPONENTS OF CAPITAL ACCOUNT�

• Investment:
• Foreign Direct Investment (FDI): When foreigners acquire our firms, open a new factory or sign a joint venture with domestic firms, investment coming in this way is called FDI.
• Foreign Institutional Investment or Portfolio Investment (FII or FPI) : When foreigners start purchasing shares in our domestic stock exchange the investment so coming is classified as FII or FPI.

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COMPONENTS OF CAPITAL ACCOUNT�

• Banking capital: it is the foreign asset holding of commercial banks.
• NRI deposits: Non-residents sometimes invest in fixed deposits in our domestic commercial banks due to difference in interest rates.

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OVERALL BALANCE OF PAYMENT�

Overall Balance of Payment =

Balance of Current Account

+ Balance of Capital Account

+ Errors & Omissions

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• BOP is said to be in equilibrium when above sum is zero (o). There is no change in official reserves.

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DISEQUILIBRIUM IN BOP

• It can be of two types:
• BOP surplus: It is when Balance of Current Account + Balance of Capital Account + Errors & Omissions > 0
• This leads to increase in Official Reserves.
• BOP deficit: It is when Balance of Current Account + Balance of Capital Account + Errors & Omissions < 0
• This leads to decrease in Official Reserves.

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AUTONOMOUS FLOWS/ ITEMS�

• These are related to transactions which are done by consideration of profit motive.
• These are also called ‘above the line items’.
• All transactions related to current account and capital account are called autonomous flows.

ACCOMMODATING FLOWS

• These are related to transactions which are done for restoring equilibrium in BOP.
• They are also called ‘below the line items’.

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DIFFERENCE

IS BOP SURPLUS ALWAYS GOOD FOR THE ECONOMY?�

• No. if there is deficit in the current account and the BOP surplus is generated by surplus in capital account, then we cannot say that it is good sign for the economy.
• BOP surplus will be good only when there is surplus in the current account.

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• Difference
• BoT and BoCurrent A/C
• BoV & BoIn
• BoCurr A/C & BoCap
• Aut & Acc

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