Balance Of Payment

SEMINAR ON
INTERNATIONAL FINANCE

GROUP : 1
Group Members :
1. Ajeesh M.K
2. Nisham M
3. Sajeesh
4. Swathy Vasudevan

BALANCE OF PAYMENT
• BOP is a statement listing receipts and payments in international
transactions of a country.
• Based on Double entry book-keeping concept.
• Credit Balance Receipt of Foreign Exchange from abroad.
• Debit Balance Payment in Foreign Exchange to foreign
residents.
• Equal debit and credit balances if entries
are done properly.

B O P ….
 The Balance of Payments of a country is a systematic record of all
economic transactions between the residents of a country and the rest of
the world.
 Presents a classified record of all receipts on account of goods exported,
services rendered and capital received by residents and payments made
by them on account of goods imported and services received from the
capital transferred to non-residents or foreigners.
 Economic Transactions – import and export (capital inflow &
outflow as FII & FDI)
• Residents - Individuals & fin. Institutions permanently residing in the country’s
border.

IMPORTANCE OF B.O.P
 Records all the transactions that create demand for and supply
of a currency.
 Indicates demand-supply equation of the currency.
 Confirm trend in economy’s international trade and exchange
rate of the currency.
 Indicate change or reversal in the trend.
 Indicate policy shift of the monetary authority (RBI) of the
country.

TYPES OF ECONOMIC TRANSACTIONS
 Cash Transactions
 Payments & Receipts
 Financial Securities
 Barter system
 Gifts & Donations (Payment/ Receipt)

B.O.PACCOUNTING
 BOP follows the accounting system of double entry.
 Balance of payments accounting system (BOP) is an accounting
system design to track buy and sell transactions between countries
by an individuals, businesses and government agencies.
 A double entry system in which each transaction creates a credit
entry and a debit entry of equal value.
 Buying goods and services creates debit entries and selling things
produces credits entries.
 The two BOP entries are used to denote the giving and receiving
sides of external transactions.

ASPECTS OF B.O.PACCOUNTING
 Each economic transactions have a debit and credit aspect.
CREDIT TRANSACTIONS DEBIT TRANSACTIONS
Exports of goods & services Import of goods & services
Income receivable from abroad Income payable abroad
Transfers from abroad Transfers to abroad
Increase in external liabilities Decrease in external liabilities
Decrease in external assets Increase in external assets

B.O.PACCOUNTING
 The net sum of credit and debit entries is zero.
 Data are collected from many sources - discrepancies
between the entries occur for various reasons.
 Omissions and inaccurate measurements may occur.
 Equality between the sum of credit and debit entries is
brought about by the inclusion of a balancing item which
reflects net errors and omissions.

B.O.P COMPONENTS
 Current Account
 Capital Account
 Official reserve account

CURRENT ACCOUNT
 Represents the real income.
 Includes :
1. Import of Goods
2. Balance of Merchandise Trade
3. Invisibles
Balance of Trade : Export – Import
Export > Import → Surplus BOT
Export < Import → Deficit BOT
Invisibles : Receipts & payments on :
1. Trade & services like tourism, transport etc
2. Interest, Dividend
3. Unilateral Transfers : Pension, Remittances, gifts

CURRENT ACCOUNT…
 Movement of Gold : Monetary or Non- monetary
{ Monetary : sale or purchase that influence international
monetary reserves. }

CAPITALACCOUNT
 Consists changes in financial position of country.
 Comprise short term and long term inflow and outflow of funds.
 Credit side records official & private borrowings from abroad net
of repayments, direct and portfolio investment and short term
investments into the county, bank balances of non residents held in
the country etc.
 Debit side records dis-investment of capital invested into the
country, the country’s investment abroad, loans given to a foreign
government and bank balances held abroad.

OFFICIAL RESERVE ACCOUNT
 The surplus of capital and current account are transffered to ORA.
 ORA can be used where there occurs future deficit.
 Only reserve assets are included.
 Reserve assets are those assets which the monetary authority of a
country used to settle the trade , the surplus or deficit that arise on
the capital and current account.
 Includes:
- The cash balance in Central Bank
- Gold
- Reserve in IMF

B.O.P EQUILIBRIUM
 Balance of payments equilibrium occurs when induced balance
of payments transactions - those engineered by the government
to influence the nominal exchange rate - are zero.
 Implies that autonomous receipts from exports and the sale of
securities abroad equal autonomous payments for imports and
the purchase of securities from foreign residents.
 Since changes in the stock of official reserves of foreign
exchange are the method used by the authorities to fix or
manipulate the exchange rate, BOP equilibrium requires that the
stock of foreign exchange reserves be constant.

B.O.P EQUILIBRIUM…
 If debit on current account is greater than the credit, funds flow into
the country that are recorded on the credit side of the capital
account and the excess of debit is wiped out.
 Ex-post Concept - Describes what has actually happened
over a specific past period
CURRENT ACCOUNT + CAPITAL ACCOUNT = 0

B.O.P DISEQUILIBRIUM
 Occurs when :
Demand ≠ Supply
Debit > Credit → Deficit

B.O.P DISEQULIBRIUM - CAUSES
1. Development Schemes :
- Huge investment in development schemes in developing
countries Export ↓ Import ↑ → Structural changes in BOP
2. Price – Cost Structure :
- Change in PCS of export industries affect export volume
- Increase in price due to higher wages, high cost of raw material
3. Change in Foreign Exchange rate :
- ↑ External value of money Import ↑ Export ↓
- ↓ External value of money Import ↓ Export ↑

B.O.P DISEQULIBRIUM – CAUSES…
4. Fall in Export Demand :
- increase in domestic production in rich countries.
- loss of colonial markets.
- more persistent in underdeveloped countries.
5. Demonstration Effect :
- People in under developed countries tend to follow consumption pattern
of developed countries imports increase and creates dis-
equilibrium
6. International Borrowing & Lending :
- Borrowing country have unfavorable bop – lending country have
unfavorable bop

B.O.P DISEQULIBRIUM – CAUSES…
7. Cyclical Fluctuations :
During depression income of people in foreign countries
fall → exports decrease → bop disequilibrium
8. Natural Factors :
- Drought, floods etc adversely affect the country production.
- Exports falls, imports increase leading to bop deficit.
9. Population Explosion :
- Rapid growth of population → imports increase → decrease export
capacity

Balance Of Payment

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