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BALANCE OF PAYMENTS

Tapan Kumar Ghosh

Department of Economics

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Definition

  • BOP of a country is a systematic record of all its economic transactions with the outside world in a given year.

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  • It has two sides:
  • Credit side (Receipts): Foreign exchange comes in

  • Debit side (Payments): Foreign exchange goes out

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Receipts

Payments

A. Current Account:

1. Export of goods (Visible exports)

1โ€™. Import of goods (Visible imports)

2. Export of services (Invisible exports)

2โ€™. Import of services (invisible imports)

3. Unrequited receipts

3โ€™. Unrequited payments

B. Capital Account

4. Capital Receipts

4โ€™. Capital Payments

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Some Definitions

  • Current account consists of all transactions relating to trade in goods and services and unilateral transfers.

  • Capital account consists of all transactions in financial assets in the form of short โ€“term and long-term lendings and borrowings, and private and official investments.

  • BOT = Visible export [1] โ€“ Visible import [1โ€™]
  • Current account balance = [1+2+3] โ€“ [1โ€™+2โ€™+3โ€™]
  • Capital account balance = 4 - 4โ€™

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Example

Receipts (in Million $)

Payments (in Million $)

1. Export of goods: 800

1โ€™. Import of goods: 1000

2. Export of services: 300

2โ€™. Import of services: 700

3. Unrequited Receipts: 100

3โ€™. Unrequited payments: 50

4. Capital Receipts: 800

4โ€™. Capital payments: 250

Total: 2000

Total: 2000

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Balance of payment always balances!

Equity Vs Equilibrium

Autonomous transaction: Transactions whose values are determined independently of the BOP

and

Accommodating transactions are determined by the net consequences of the autonomous items.

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Receipts (in Million $)

Payments (in Million $)

Autonomous transactions:

1. Export of goods: 800

1โ€™. Import of goods: 1000

2. Export of services: 300

2โ€™. Import of services: 700

3. Unrequited Receipts: 100

3โ€™. Unrequited payments: 50

4a. Capital Receipts: 200

4โ€™a. Capital payments: 250

Accommodating transactions:

4b. Capital Receipts: 600

4โ€™b. Capital payments: 0

Total: 2000

Total: 2000

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  • Autonomous receipts โ€“ Autonomous payments =

1400 โ€“ 2000 = 600

Deficit in BOP

Equity but disequilibrium in BOP