Chapter-1B International Flow of Funds - BOP

7/27/2019 Chapter-1B International Flow of Funds - BOP

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Prof. Suprio Ghatak, Amity Business School, Amity University Haryana1

International Flow of Funds Balance of Payments

Chapter 1-B


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Balance of Payments

How the cross-border flow of funds isrecorded in different countries by themonetary authorities.

The statement is a macro-economic onecalled BOP.


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Structure of BOP

Lists receipts and payments of a countrys international transactions.

Credit balance receipts of foreign exchange fromabroad.

Debit balance payments in foreign exchange toforeign residents.

Both are equal if entries properly done.


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Current Account Transactions

Receipts and payments of foreign exchange

Receipts 1. Export of Goods effects flow of foreign exchange into the

country

2. Invisibles Non-merchandise trade. Receipts and paymentsfor trade in services like travel and tourism, transport, etc.,investment income like interest and dividend, and unilateraltransfers, like pension, remittances, gifts, etc. for which nospecific services are rendered. Unlike exports and imports, inunilateral transfers flow of funds are in one direction that isdirection of payment.

3. Non-monetary movement of gold


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Payments

1. Import of Goods causes outflow of foreignexchange from the country

2. Invisibles

3. Non-monetary movement of gold


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Difference between exports and imports is balanceof trade (BOT).

Export exceeds import BOT is surplus

Import exceeds export BOT is deficit

Chapter-1 Problems.doc Problem-1
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Movement of gold may be monetary or non-monetary.

Monetary movement sale or purchase thatinfluences international monetary reserves.

Non-monetary movement sale and purchase isdone for industrial purposes that are shown in thecurrent account, either separately or with trade inmerchandise.


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On account of these transactions, if credit side isgreater than debit side, balance of current accountturns surplus.

For the reverse, it shows a deficit.


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Capital Account Transactions

Long term and short term inflow and outflow of funds under capital account receipt and payment.

Long term transactions maturity periods of over 1year

Short term transactions Less than 1 year


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Credit side Official and private foreign borrowings,net of repayments, direct and portfolio investmentand short term investment into the country.

Bank balances of non-residents held here.

Debit side Disinvestment of capital invested here,investments abroad, loans to foreign governmentsand parties, bank balances held abroad.


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Credit side of current account + credit side of longterm capital account transactions, compared with

Debit side of current account + long term capitalaccount,

Difference = Basic Balance

May be negative or positive


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Table-2.1 indicates a deficit basic balance of $ 5billion. (to be photocopied page-16)

In India and many other countries, basic balance isnot shown in the BOP statement.

Debit and credit sides of the short term capitalaccount transactions added.

Then Capital account is balanced.



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After balancing, errors and omissions (statistical discrepancy)are mentioned.

Compare both sides.

Difference is the overall balance

Errors and omissions may be due to

Data collection difficulties

Different sources having different approaches

Some figures based on estimates, like travel and tourism onbasis of sample cases.


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Example:Trade figures compiled by RBI differ from that of Director-General of Commercial Intelligence andStatistics

Movement of capital may precede or follow transactionsfor finance.

Example:Payment for goods shipped in March may be received in

April.

March figure on shipment will differ from that based onactual payment.


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When overall balance is deficit, monetary authoritiesarrange for capital flows.

Like official borrowings or purchases (drawings)from IMF.

Accommodating or compensatory capital flow , if taken for meeting BOP deficit.

Autonomous capital flow takes place regardless of such considerations.


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Foreigner paying back the loan or inflow of FDI is anappropriate example.

Autonomous capital inflow goes above-the-line.

Accommodating capital inflow goes below-the-line.


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Home Work



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Self-Study

Official Reserves Account

Equilibrium, Disequilibrium and Adjustment

Pages 18 to 20 Chapter-2 IFM by V. Saran


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Assignment-2

1. Discuss Capital Account Convertibility

2. Discuss the following cases.

a) Case Study-1 Indias BOP During LiberalEconomic Regime

b) Case Study-2 Capital Account Convertibility inIndia

Pages-26 to 36

Documents

Chapter-1B International Flow of Funds - BOP