BALANCE OF PAYMENT

Presentation
on
Balance Of Payment
(BOP)

Introduction
 Balance of payments (BOP) accounts are an accounting record of all

monetary transactions between a country and the rest of the world.
These transactions include payments for the country's exports and
imports of goods & services, financial capital, and financial transfers.
 A country has to deal with other countries in respect of 3 items: Visible items which include all types of physical goods exported and

imported.
 Invisible items which include all those services whose export and

import are not visible. e.g. transport services, medical services etc.
 Capital transfers which are concerned with capital receipts and

capital payment.

Definition-

 According to Kindle Berger, "The balance of payments of a

country is a systematic record of all economic transactions
between the residents of the reporting country and residents
of foreign countries during a given period of time".

Features
 It is a systematic record of all economic transactions

between one country and the rest of the world.
 It includes all transactions, visible as well as invisible.
 It relates to a period of time. Generally, it is an annual
statement.
 It adopts a double-entry book-keeping system. It has two
sides: credit side and debit side. Receipts are recorded on
the credit side and payments on the debit side.

Components of BOP
1. Current Account Balance
 BOP on current account is a statement of actual receipts

and payments in short period.
 It includes the value of export and imports of both visible
and invisible goods. There can be either surplus or deficit
in current account.
 The current account includes:- export & import of
services, interests, profits, dividends and unilateral
receipts/payments from/to abroad.

2. Capital Account Balance
 It is difference between the receipts and payments on

account of capital account. It refers to all financial
transactions.
 The capital account involves inflows and outflows relating to
investments, short term borrowings/lending, and medium
term to long term borrowing/lending.
 There can be surplus or deficit in capital account.
 It includes: - private foreign loan flow, movement in banking
capital, official capital transactions, reserves, gold
movement etc.

3. Overall BOP -:
Total of a country’s current and capital account is reflected in
overall Balance of payments. It includes errors and omissions
and official reserve transactions.
The errors may be due to statistical discrepancies & omission
may be due to certain transactions may not be recorded.
For e.g.: A remittance by an Indian working abroad to India may
not yet recorded, or a payment of dividend abroad by an MNC
operating in India may not yet recorded or so on.
The errors and omissions amount equals to the amount
necessary to balance both the sides

Causes of Disequilibrium
Natural causes – e.g. floods, earthquake etc.
2. Economic causes – e.g. Cyclical Fluctuations, Inflation,
Demonstration Effect etc.
3. Political causes – e.g. international relation, political
instability, etc.
4. Social factors – e.g. change in taste and preferences etc.
1.

How to correct the Balance of Payment?
1. Monetary measures –
 Deflation - Deflation means falling prices. Deflation has

been used as a measure to correct deficit disequilibrium. A
country faces deficit when its imports exceeds exports.
 Deflation is brought through monetary measures like bank
rate policy, open market operations, etc. or through fiscal
measures like higher taxation, reduction in public
expenditure, etc.
 Deflation would make our items cheaper in foreign market
resulting a rise in our exports. At the same time the demands
for imports fall due to higher taxation and reduced income.
 This would build a favourable atmosphere in the balance of
payment position. However Deflation can be successful
when the exchange rate remains fixed.

 Exchange Depreciation - Exchange depreciation

means decline in the rate of exchange of
domestic currency in terms of foreign currency.
This device implies that a country has adopted a
flexible exchange rate policy.
 Suppose the rate of exchange between Indian
rupee and US dollar is $1 = Rs. 40. If India
experiences an adverse balance of payments
with regard to U.S.A, the Indian demand for US
dollar will rise.
 The price of dollar in terms of rupee will rise.
Hence, dollar will appreciate in external value
and rupee will depreciate in external value. The
new rate of exchange may be say $1 = Rs. 50.
This means 25% exchange depreciation of the

 Devaluation - Devaluation refers to deliberate

attempt made by monetary authorities to bring
down the value of home currency against foreign
currency.
 When devaluation is effected, the value of home
currency goes down against foreign currency, Let
us suppose the exchange rate remains $1 = Rs. 10
before devaluation. Let us suppose, devaluation
takes place which reduces the value of home
currency and now the exchange rate becomes $1
= Rs. 20.
 After such a change our goods becomes cheap in
foreign market. This is because, after devaluation,
dollar is exchanged for more Indian currencies

2. Non-Monetary Measures –
 Export Promotion –
 The government can adopt export promotion measures to

correct disequilibrium in the balance of payments. This
includes substitutes, tax concessions to exporters, marketing
facilities, credit and incentives to exporters, etc.
 The government may also help to promote export through
exhibition, trade fairs; conducting marketing research & by
providing the required administrative and diplomatic help to
tap the potential markets

 Quotas –

 Under the quota system, the government may fix

and permit the maximum quantity or value of a
commodity to be imported during a given period.
By restricting imports through the quota system,
the deficit is reduced and the balance of
payments position is improved.
 Tariffs –

 Tariffs are duties (taxes) imposed on imports.

When tariffs are imposed, the prices of imports
would increase to the extent of tariff. The
increased prices will reduced the demand for

How to correct the Balance of Payment?
1. Monetary measures –
 Deflation

 Exchange Depreciation
 Devaluation
2. Non-Monetary Measures –
 Export Promotion
 Quotas
 Tariffs

 This data represent that: Exports of 2006-07 is 128888 and import is 190670
which means that trade balance (BOT) is deficit

means import is greater than exports. It shows that
the BOP of year 2006-07 is unfavourable.
 Similarly, export of year 2007-08, 2008-09, 2008-10
is also less than import which means that BOP of
these years also unfavourable. And trade balance is
deficit (import>export)

Balance of Trade
 The difference between a country's imports and its

exports. Balance of trade is the largest component
of a country's balance of payments.
 Debit items include imports, foreign aid, domestic
spending abroad and domestic investments abroad.
 Credit items include exports, foreign spending in the
domestic economy and foreign investments in the
domestic economy.
 When exports are greater than imports than the
BOT is favourable and if imports are greater than
exports then it is unfavourable

BOP vs. BOT
 BOP

 BOT

1.

It is a broad term.

1.

It is a narrow term.

2.

It includes all transactions related
to visible, invisible and capital
transfers.

2.

It includes only visible items.

3.

It is always balances itself.

3.

It can be favourable or unfavourable.

4.

BOP = Current Account + Capital
Account + or - Balancing item (
Errors and omissions)

4.

BOT = Net Earning on
Export - Net payment for imports.

5.

Following are main factors
which affect BOT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods manufactured at
home

5.

Following are main factors
which
affect
BOP
a) Conditions of foreign lenders.
b) Economic policy of Govt.
c) all the factors of BOT

BALANCE OF PAYMENT

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