c2786Balance of Payment

8/2/2019 c2786Balance of Payment

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Balance of Payment

It is a systematic record of a country,s

economic and financial transactions with the

rest of the world, over a period of time. It shows the relationship between one

countrys total payments to all other countries

and its total receipts from them


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The IMF publication Balance of Payment

Manual describes the concept as

1. Transaction of goods and services and income

between an economy and the rest of the world.

2. Changes of ownership and other liabilities onthat countrys monetary gold, Special Drawing

rights and claim on liabilities to the rest of the

world3. Any entries for the foregoing transactions and

changes which are not mutually offsetting.


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Features of BoP

1. It is a systematic record of all economic

transactions between one country and the rest of

the world.

2. It includes all transactions visible as well asinvisible.

3. It relates to a period of time. Generally it is an

annual statement.

4. It adopts a double-entry book-keeping system.

5. When receipts are equal to payments, the balance

of payment is in equilibrium.


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Balance of payment and Balance of Trade

BoT refers to the export and import of visible

items, i.e., material goods. It is the difference

between the value of visible exports andimports.

Visible items are those items which are recorded

in the customs returns

BoP, on the other hand, is a more

comprehensive concept because it covers

visible as well as invisible items


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Components of Balance of Payment

1. Current Account

2. Capital Account

3. Unilateral Payment Account

4. Official Reserve Assets Account


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Current Account

The current account of BoP includes all transactions

which give rise to or use up national income.

It relates to real and short term transactions.It contains receipts and payments on account of

exports, visible and invisible items.

Transactions in the current account are called real

transactions because they are concerned with actualtransfer of goods and services which affect income

and, o/p and expenditure of the country.


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Items of Current Account

Merchandise

Travel

Transportation Insurance

Investment income

Government transaction

Miscellaneous

Donations and gifts


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Capital Account

It deals with the financial transactions.

It includes short term and long term

international movements of capital.

Gold transactions also form part of the

capital account.

If a country lends or invests abroad, it is a

payment and will be recorded on the debit side.

Borrowings from abroad or the foreign

investments in the home country are entered on

the credit side.


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Items of Capital Account

1. Private loans

2. Movements in Banking Capital


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Unilateral Transfer Account

It is another term for gifts and includes

private remittances, government grants and

disaster relief


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Official Reserve Account

It represents the holdings by the government

or official agencies of the means of payment

that are generally accepted for the

settlement of international claims.


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Balance of Payment

Disequilibrium

The BoP of a country is said to be in

equilibrium when the demand for foreignexchange is exactly equilivalent to the supply

of it. The BoP is regarded as being in

disequilibrium when it shows either a surplus

or deficit.


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Causes of Disequilibrium

1. Economic factors

2. Political factors

3. Sociological factors


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Economic factors

1. Development Disequilibrium

2. Cyclical Disequilibrium

3. Secular Disequilibrium

4. Structural Disequilibrium


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Political factors


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Social factors


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Correction of Disequilibrium

A country may not be bothered about a

surplus in the BoP but every country strives

to remove or at least reduce a BoP deficit


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Correcting the BoP

Automatic correction Deliberate measures


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Deliberate measures

1. Monetary measures

2. Trade measures

3. Miscellaneous measures


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Monetary measures

Monetary Contraction

Devaluation

Exchange Control


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Trade Measures

Export Promotion

Import Control

Documents

c2786Balance of Payment