Balance of payments Presentation (complete)

BALANCE OF PAYMENTS
Equilibrium
vs
Disequilibrium
Debit
vs
Credit
BOP
Calculation
Balance of
Trade
General
Rules of BOP

BALANCE OF PAYMENTS (BOP)
The BOP records all economic transactions of a country with
the rest of the world for a specified time period, usually a year.
• Debit and credit transactions.
• All international monetary transactions.
• Trades conducted by both the private
and public sectors.
In simple terms, it is a
systematic accounting
balance sheet of the
country and includes;

BOP – COUNTRY TO COUNTRY TRADE
• VISIBLE ITEMS:
Physical goods exported and imported.
• INVISIBLE ITEMS:
Services whose export and import are not visible. e.g.
transport services, medical services etc.
• CAPITAL TRANSFERS:
Concerned with capital receipts and capital payment.

IMPORTANCE OF BOP
Informs about country’s surplus or a deficit of funds.
Judge financial status of a country in the short-term.
Trend in economy’s international trade and exchange rate of the currency.
This may indicate policy shift of the monetary authority of the country.
Overall, BOP helps to know the strength and weaknesses of the economy.

• Credit items:
• include exports, foreign spending in the
domestic economy and foreign
investments in the domestic economy.
If a transaction earns foreign
currency for the nation, it is a
credit and is recorded as a
plus item.
• Debit items:
• Imports, foreign aid, domestic spending
abroad and domestic investments
abroad.
If a transaction involves
spending of foreign currency it
is a debit and is recorded as a
negative item.

BALANCE OF PAYMENTS VS BALANCE OF TRADE
BOP
All transaction with rest of the
world
It is a broad term.
Visible & invisible transaction and capital
transfers.
BOP=Current + Financial + Capital account ±
Errors & Omissions
BOT
Trade transaction with the rest of
the world
It is a narrow term.
It includes only visible items.
BOT = Net earning on export – Net
payment for imports

COMPONENTS OF BOP
BALANCE OF PAYMENTS = Current Account + Financial Account + Capital Account +
Balancing Item
CURRENT ACCOUNT : Represents the sum of net exports, factor income, and cash transfers.
FINANCIAL ACCOUNT : measures the net change in ownership of national assets.
CAPITAL ACCOUNT : Measures non-produced and non-financial assets, as well as capital
transfers.
BALANCING ITEM : Errors & Omission

CALCULATING BALANCE OF PAYMENT
• Calculate Current Account : CA = (X−M)+NY+NCT
• Calculate Financial Account : It has following four components;
• Foreign direct investment
• Portfolio investment
• Other investment
• Reserve account flows
• Calculate the Capital Account : Can be split into two categories;
• Non-produced and Non-financial assets
• Capital transfers

CALCULATING BALANCE OF PAYMENT

BOP EQUILIBRIUM AND DISEQUILIBRIUM
The country is said to be in BOP equilibrium
when the value of total receipts is equal to
total payments. It means the net value is
zero.
The country is said to be in BOP
disequilibrium when the value of total
receipts is not equal to total payments. It
means the net value is not zero. It is either
surplus or deficit.

BOP DISEQUILIBRIUM
• A Surplus in the BOP occurs when Total Receipts exceeds Total Payments.
Thus, BOP= CREDIT>DEBIT
• A Deficit in the BOP occurs when Total Payments exceeds Total Receipts.
Thus, BOP= DEBIT>CREDIT

TRADE OUTLOOK
TRADE VALUES IN USD MILLION TRADE VALUES IN USD MILLION

TRADE OUTLOOK
TRADE VALUES IN USD MILLION

CAUSES OF DISEQUILIBRIUM
Fiscal Policies
Short fall in the exports
Economic Development
Rapid increase in population
Consumption oriented society
Inflation
International Capital Movements

MEASURES TO CORRECT DISEQUILIBRIUM
Monetary Measures
• Monetary policy
• Fiscal Policy
• Exchange rate depreciation
• Devaluation
• Deflation
Non-Monetary Measures
• Export promotion
• Import substitutes
• Import control
1. Quotas
2. Tariffs

Thank You
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Balance of payments Presentation (complete)

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