3/11/2010

Balance of payments

Balance of payments (BoP)

„ BoP is a statistical statement summarizing
economic i ttransactions
ti off an economy with
ith the
th restt
of the world
„ It includes
{ Transactions in goods and services between our economy
and rest of the world
{ Changes in ownership of the country’s monetary gold, other
assets and claims and liabilities
{ Unrequited transfers
„ Presents a picture of a country’s external
transactions

1
 3/11/2010

Contd….
„ BoP comprises visible and invisible trade (goods
andd services)
i ) stated
t t d iin th
the currentt accountt and
d
foreign investments, external assistance, lending
and borrowing, debt servicing, deposits of non-
residents, etc. on the capital account
„ Accounting statement – double entry book keeping
– credit and debit entries
„ Errors & omissions added to balance the statement

Balance of trade (BoT)

„ BoT includes transactions arising out of exports and
imports of only visible items or goods
„ Does not include invisible trade items or services
like banking, insurance, interest payments, etc.
„ Visible items or merchandise trade in the current
account of the BoP

2
 3/11/2010

Components of BoP
„ Current account – records transactions in goods
and services with the rest of the world – these
transactions use up or add to national income
{ Merchandise exports and imports – goods trade
{ Invisible exports and imports – transport, insurance,
tourism, incomes in the form of interests and dividends on
investments abroad
„ Capital account – records transactions related to
g
short-term and long-term capital
p inflows & outflows
„ Unilateral transfers account – includes private
remittances, govt. grants, disaster relief, etc.
„ Official reserves account – govt. holdings generally
acceptable for international payments

BoP disequilibrium
„ Balance on current account
{ Surplus
p or deficit when the net inflow is p
positive or net
inflow is negative respectively
{ Y = C + I + G + (X – M)
{ X – M determines surplus or deficit
„ Balance of payments equilibrium
{ Difference between demand for and supply of foreign
exchange determines surplus or deficit
„ Balance of payments disequilibrium
{ Economic causes – large scale developmental
expenditures, cyclical fluctuations, structural causes,
secular or long-term causes
{ Political and social causes

3
 3/11/2010

Measures to correct disequilibrium

„ Auto correction mechanism
„ Monetary measures
{ Monetary expansion/contraction
{ Devaluation/revaluation
{ Exchange control
„ Trade measures
{ Export promotion through incentives, subsidies
{ Import control
„ O h measures
Other
{ Foreign loans
{ Encouraging foreign investment
{ Encouraging inward remittances
{ Import substitution