balance of payments 478853858

7/30/2019 Balance of Payments 478853858

1/26

Balance of PaymentsPresented by

Mamta Kataria


2/26

Contents

Meaning

Objective

Characteristics

Structure

Components

Balance of payments Surplus and Deficit

Ways of Measuring of Deficit and Surplus

Meaning of disequilibrium in balance of payments

Causes of disequilibrium in balance of payments

Measures to correct disequilibrium in Balance of Payments


3/26

Balance of Payments

A record of internationaltransactions betweenresidents of one

country and the rest ofthe world


4/26

Objective

Its main objective is to represent the economic

position of a country, whether its currency is

rising or falling in its external value.


5/26

Characterstics of Balance of

Payments

It is statement having two sides.

It is a record of economic transaction.

It shows a relation between receipts &payments.

Visible & Invisible items both are included in

this statement. It is prepared for a certain period of time.


6/26

Structure of balance of payments

accounts

The balance of payments account of a country isbased on the principle of double-entry book-keeping.

Each transaction is entered on the credit anddebit side of statement. But balance of paymentsaccounting differ from business accounting inone respect. In business accounting, debit(-) areshown on the left side


7/26

Continue.

and credits (+) on the right side of statement .But in the balance of payments accounting,debits are shown on the right side and credits on

the left side of the statement. For example:When a payment is received from a foreigncountry, it is a credit transaction while paymentto a foreign country is a debit transaction.


8/26

Components of Balance of payments

Current Account

Capital Account

Official Account Current Account- The current account of a

country consists of all transactions related to

trade in goods and services and unilateraltransfers.


9/26

Continue

Capital Account- The capital account of a

country consist of its transaction in financial

assets in the form of short-term and long-term

lending and borrowing.


10/26

Continue.

Official Settlement Account

In fact it is a part of capital account. But in UK

and USA balance of payments accounts shows

as a separate account.

It measures the change in nations liquid and

non liquid liabilities to foreign official holders

and the change in nations official reserve assets.


11/26

Table. Balance of Payments account

Credits(+) (Receipts) Debits(-)PaymentsCurrent Account

Exports Imports

(a) Goods Goods

(b) Services Services

(c) Transfer payments Transfer payments

Capital Account

Borrowing from Lending to Foreign Countries

Foreign countries

Direct Investments

By Foreign countries Direct Investments in Foreign

countriesOfficial Settlements Account

Increase in Foreign Official Holdings Increase in Official Reserve

of Gold and Foreign Currencies

Errors and Omissions


12/26

Major items of Indias Balance of

Payments (US$ Million)2007-08(PR) 2008-09(P) April-Dec(2008-

09)(PR)April-Dec(2009-

2010)(P)

Export 166163 175184 150520 124473

Import 257789 294587 248967 213988

Trade Balance -91626 -119403 -98446 -89515

Invisible,net 74592 89587 70931 59185Current Account

Balance

-17034 -29817 -27516 -30330

Capital Account* 109198 9737 7136 41630

Change in Reserve -92164 20080 20380 -11330

Source: Reserve Bank of India Report

F l


13/26

For exampleTrade balance

Debit: Sun Microsystems buys LCDs from Hong Kong.

Credit: Singapore Airlines buys Boeing jet.

Trade in services

Debit: American rents an apartment in Singapore.

Credit: TUI - Germany places an ad in the NYT.

Income payments

Debit: Honda US pays dividend to Honda Japan.

Credit: Bank Austria pays salary to rep in NY office.Unilateral Current Transactions

Debit: Peace Corps pays US volunteer teachers in Bosnia.

Credit: TotalFina pays tuition of employee for Stern MBA.


14/26

BOP Surplus and Deficit

What is BOP Surplus ?

What is BOP Deficit ?


15/26

Ways Of Measuring of Deficit or

Surplus

Basic balance

Net liquidity balance

Official settlement balance.


16/26

Continue.

Basic balance- which includes the currentaccount balance and long-term capital accountbalance

Net-liquidity balance- which includes basicbalance and short-term non liquid balance,allocation of SDRs.

Official settlement account-It includes total netliquid balance and short term liquid balance.


17/26

Meaning of disequilibrium in

balance of payments

A countrys balance of payments is in

disequilibrium when there is no perfect equality

between the demand and supply for foreign

exchange.


18/26

Causes of disequilibrium in balance

of payments

Temporary causes

National Income

Inflation Economic Development

Borrowing and Lending

Change in exchange rate Political factors-like instable govt.


19/26

Continue

Temporary Causes- Temporary causes mayarises due to variations in the trade, effect ofweather on agriculture production etc.

National Income - Another cause is thechange in countrys national income. If thenational income of a country increases, it willlead to an increase in imports thereby creating adeficit in balance of payments.


20/26

Continue.

Inflation- Inflation is another cause of

disequilibrium in the balance of payment. If

there is inflation in the country prices of exports

increase, thus increase in export prices leading todecline in exports and rise in imports result in

adverse.


21/26

Continue.

Economic Development-A countrys balance of

payments also depends on its stage of economic

development. If a country is developing it will

have a deficit in its balance of payments.


22/26

Continue

Borrowing and lending- A country which gives

loans and grants on a large scale to other

countries has a deficit in its balance of payments

on capital account. On the other hand, adeveloping country borrowing large funds from

other countries may have a favourable balance

of payments.


23/26

Continue.

Change in exchange rateThis change arise due

to change in exports and imports. If exports of

the country are more then imports the demand

for its currency increase so that the rate ofexchange moves in favours. On the other hand

if imports are more than exports the demand for

the foreign currency increase and the rate ofexchange will against the country.


24/26

Continue

Political factors like instable govt.

Lack of export substitution

More imports


25/26

Measures of disequilibrium in

balance of payments

Full convertibility of rupee

Export promotion

Import substitution Export oriented units

Special economic zones

Devaluation of Currency Improvement in advance licensing


26/26

Continue

Foreign loans

Encouragement to foreign investment

Incentives to tourism

balance of payments 478853858

Documents