BALANCE OF PAYMENT

INTRODUCTION TO BOP

BOP is an accounting system that records the economic transaction between the residence & government of the particular country annually.

DEFINITION “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. It 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’.” – Reserve Bank of India (RBI)

BALANCE OF PAYMENT ACCOUNTING

BOP follows the principle of double entry system , which means every international transactions produces debit & credit entries of equal magnitude. But it is neither an income statement nor an balance sheet. It is a sources & uses of funds statement that reflects changes in assets & liabilities & net worth during a specific period of time.

ASSETS LIABILITIES OR NET WORTH

REPRESENTS

Decrease Increase Cr Fund / Sources of fund

Increase Decrease Dr Fund / Uses of fund

REFLECTION OF CHANGES

Sources of fund includes ; export of goods & services investment & interest earning unilateral transfer received from abroad & loans from foreigners.

Uses of fund includes ; imports of goods & services dividend paid to foreign investors transfer payment abroad & loans to foreigners increase in reserve assets.

Therefore BOP accounts shows the size of any surplus or deficit , which a nation can have and also indicate the manner in which a deficit was financed or the proceeds of a surplus invested.

EXPENDITURE & RECIEPTS

Expenditure > Receipts Expenditure < Receipts

REPRESENTS

Deficit

Surplus

IMPORTANCE OF BOP The BoP is an important indicator of pressure

on a country’s foreign exchange rate .

The BOP helps to forecast a country’s market potential, especially in the short run.

Changes in a country’s BOP may signal the imposition or removal of controls over payment of dividends and interest, license fees, royalty fees, or other cash disbursements to foreign firms or investors.

CONTENTS OF BOPCurrent account Capital accountFinancial accountNet errors and omissions account

Reserves and related items: official reserve account

CURRENT ACCOUNT

Net export/import of goods (trade balance) Net export/import of services Net income (investment income from direct

and portfolio investment plus employee compensation)

Net transfers (sums sent home by migrants and permanent workers aboard, gifts, grants and pensions)

CAPITAL ACCOUNTCapital transfers related to the purchase and sale of fixed assets such as real estate

FINANCIAL ACCOUNT

Net foreign direct investment

Net portfolio investmentOther financial items

NET ERRORS AND OMISSIONS ACCOUNTMissing data such as illegal transfers

RESERVES AND RELATED ITEMS: OFFICIAL RESERVE

ACCOUNT

Changes in official monetary reserves including gold, foreign exchange, and IMF position.

COMPONENTS OF THE TRADE

Imports-bulk imports: petroleum, crude & products,

bulk consumption goods, other bulk items.-non bulk imports: capital goods, mainly export

related items Exports-agriculture and allied products, ores and

minerals, manufactured goods, mineral fuels.

BOP STATEMENT

Official Result

Account

Current Accoun

t

Capital Accou

nt

DIRECTION OF INDIA’S EXPORTS

euopean union

north america

other OECD

OPEC

eastern europe

developing countries

DIRECTION OF INDIA’S IMPORTS

european union

north americaother OECD

OPEC

eastern europe

developing countries

THANK YOU