balance of payment (bop)
TRANSCRIPT
Balance of Payment Balance of Payment (BOP)(BOP)
Kanchan Kandel
BBA 8th
Background Background In a free economy, the price of a country’s
currency depends on the demand and supply of the currency.
Any factor which increases the demand of the currency increases its price whereas those factors which increases the supply of the currency decreases its price.
The record of such factors is simply termed as BOP.
Introduction Introduction Statically records of country’s international
transaction over a certain period of the time presented in the form of double entry book keeping.
All trade conducted by both the private and public sectors are accounted for BOP in order to determine how much money is going in and out.
Example of international transaction includes imports and exports of goods (balance of trade) and services and cross broader investment in business, bank account, bond and real assets.
If country received money then its terms as credit(+) transaction whereas if country pay money than it is term as debit(-) transaction.
Cont….Cont….In BOP account, any transaction that results in a receipts
from foreign will be recorded as credit with positive sign whereas any transaction that results, give rise to a payment to foreigner will be record as a debit, with a negative sign.
Credit entries in the BOP means results from foreign sales of goods and services, goodwill, financial claim and real assets.
Debit entries on the other hand arise for purchase of a foreign goods and services, goodwill, financial claims, and real assets.
Credit entries gives rise to demand for domestic currency, where as debit entries gives rise to supply of domestic currency.
BOP Credits•Increases in:• Domestic
Liabilities• Revenues
•Decreases in:• Assets• Expenses
BOP Debits•Decreases in:• Domestic
Liabilities• Revenue
•Increases in:• Assets• Expenses
Type of BOPType of BOPCurrent account: It includes exports and
imports of goods and services.
Capital account: It include all the purchase and sales of assets such as stocks, bonds, bank account, real assets and business.
Official reserve account: It all the purchase and sales of internal reserve assets such as foreign currency at foreign bank, gold and special drawing rights (SDRs).
Credits Debits 1 Exports 1.1 Merchandise 1.2 Services 1.3 Factor income2 Imports 2.1 Merchandise 2.2 Services 2.3 Factor income3 Unilateral transfer (net)Balance on current account (1+2+3)Capital Account4 Foreign direct investment5 portfolio investment 5.1 Equity securities 5.2 Debt securities6 Other investmentBalance of capital account (4+5+6)7 Official Reserve Account8 Statistical discrepancies
Current Account Current Account Current account in BOP can be define as export- imports
plus unilateral transfer.The deficit on current account (CA) implies that country
used up more than it produce.Deficit (surplus) represent a reduction (increase) in its net
foreign wealth.It can be further divided as: Merchandise trade : Record of exports and imports of country in
tangible goods. it is shown by balance of trade Services: it shows payment and receipts of legal, consulting and
engineering services, royalties for patents and intellectual properties, insurance premiums, shipping fees and tourist expenditure
Cont…Cont… Factor income: It include payments and receipts of interest,
dividends and other income on foreign investment that were previous made.
If Nepalese investor received interest on their holdings of foreign bonds, for instance it will be recorded as a credit in balance of payment. Where as interest payments made by Nepalese Brower to foreign creditors will recorded as debit.
Unilateral transfer: Unrequited payment, example including foreign aids, donation, official and private grants, gifts, remittance.
Unlike other accounts, in BOP, Unilateral transfer have only one directional flows, without offsetting flows.
In merchandise trade, goods flow in one direction and payments flow in the opposite direction.
Capital AccountCapital AccountThe capital account balance measure the difference
between Nepal sales of assets to foreigner and Nepal purchase of foreign assets.
Nepal sales (exports) of assets are record as credit as they result in capital inflow, whereas Nepal purchase(imports) of foreign assets are recorded as debit, as they leas to capital outflow
Unlike trade in goods and services, trade in financial assets affect future payments and receipts of factor income.
It can be divided as: Foreign Direct Investment(FDI)
Portfolio Investment
Other [email protected]
Cont..Cont..FDI occurs if return from the foreign investment exceeds from
cost of capital.Change in exchange rate should offset return. So FDI increase
when Domestic Currency appreciate.Portfolio investment is investment in shares and bonds.Sensitive to change in interest rate and change in exchange rate.Other investment: Transaction in currency, bank deposits,
trade credit and s forth.Sensitive to change in interest rate and change in exchange rate.If interest rate rise, ceteris paribus, than capital inflow high and
vice versa.
Cont..Cont..In short run depreciation in currency will
increase exports and make positive impact on balance of trade.
Country’s current account deficit must be paid for either by borrowing from foreigner or by selling off past investment. In the absence of government reserve transaction, The current account balance must be equal to the capital account balance, but with opposite sign
Official Reserve AccountOfficial Reserve AccountWhen a country must make a net payment to
foreigners because of balance of payment deficit, the central bank of the country should either rundown official assets
If there is negative sign it would have indicating a supply of domestic currency because of purchase of gold, foreign currency.
Central bank sells currency when it is trying to prevent an appreciation of domestic currency Vis-a Vis other currency and vice versa
Statistical DiscrepancyStatistical DiscrepancyA discrepancy can exits because of omission or misreport
of transaction or errors in estimating many items.Recording of payments and receipts arising from
international transaction are done at different time and place, possibly using different method.
Data on travel expenditure are estimated from questionnaire surveys of limited number of traveler. The average expenditure discovered in a survey is multiplied by number of travelers.
Illegal transaction of foreign currency or unreported or unrecorded income on investment
