Balance of Balance of PaymentsPayments

ContentsContents

• Balance of Payments (BOP).Balance of Payments (BOP).• Nature of BOP.Nature of BOP.• Format of BOP.Format of BOP.• Components of BOP.Components of BOP.• Balance of Payments Balance of Payments ‘‘SurplusSurplus’’ and and ‘‘DeficitDeficit’’..• The BOP of a Country Always Balances.The BOP of a Country Always Balances.• The BOP Account of a Country.The BOP Account of a Country.• Specific Uses of BOP for a Business Specific Uses of BOP for a Business

Manager.Manager.

Balance of Payments Balance of Payments (BOP)(BOP)

““A systematic record of all A systematic record of all economic transactions economic transactions between the residents of between the residents of the reporting country and the reporting country and residents of foreign residents of foreign countries.”countries.”

Nature of Balance of Nature of Balance of PaymentsPayments

• It is a statement having two sides.It is a statement having two sides.• It is a record of economic transaction.It is a record of economic transaction.• It shows a relation between receipts & It shows a relation between receipts &

payments.payments.• Visible & Invisible items both are included in Visible & Invisible items both are included in

this statement.this statement.• It is prepared for a certain period of time.It is prepared for a certain period of time.

Format of Balance of Format of Balance of PaymentsPayments

• Current AccountCurrent Account

• Capital AccountCapital Account

• Official Reserves Official Reserves AccountAccount

Components of Balance of Components of Balance of PaymentPayment

• Current Account- Current Account- The current account The current account of a country consists of all transactions of a country consists of all transactions related to trade in goods and services and related to trade in goods and services and unilateral transfers.unilateral transfers.

• Capital Account- Capital Account- The capital account of The capital account of a country consist of its transaction in a country consist of its transaction in financial assets in the form of short-term and financial assets in the form of short-term and long-term lending and borrowing. long-term lending and borrowing.

Official Reserves AccountOfficial Reserves Account• In fact it is a part of capital account. But in In fact it is a part of capital account. But in

UK and USA balance of payments accounts UK and USA balance of payments accounts shows as a separate account.shows as a separate account.

• It measures the change in nationIt measures the change in nation’’s liquid and s liquid and non liquid liabilities to foreign official holders non liquid liabilities to foreign official holders and the change in nationand the change in nation’’s official reserve s official reserve assetsassets..

Components of Balance of Components of Balance of Payment (Contd…)Payment (Contd…)

BOP Surplus and DeficitBOP Surplus and Deficit• BOP Surplus- BOP Surplus- An imbalance in a nation's An imbalance in a nation's

balance of payments in which payments balance of payments in which payments made by the country are less than payments made by the country are less than payments received by the country. This is also termed received by the country. This is also termed as favorable balance of payments.as favorable balance of payments.

• BOP Deficit- BOP Deficit- An imbalance in a nation's An imbalance in a nation's balance of payments in which payments balance of payments in which payments made by the country exceed payments made by the country exceed payments received by the country. This is also termed received by the country. This is also termed as unfavorable balance of payments.as unfavorable balance of payments.

Balance of Payments of a Balance of Payments of a Country Always BalancesCountry Always Balances

• The debit side shows the use of total foreign The debit side shows the use of total foreign exchange acquired in a particular period.exchange acquired in a particular period.

• The credit side shows the sources from which The credit side shows the sources from which the foreign exchange is acquired during a the foreign exchange is acquired during a particular period.particular period.

• Against every credit entry, there is an offsetting Against every credit entry, there is an offsetting debit entry & vice-versa, so the receipts and debit entry & vice-versa, so the receipts and payments on these two sides must be equal. payments on these two sides must be equal. Hence the two sides must necessary balance.Hence the two sides must necessary balance.

Balance of Payments of a Balance of Payments of a Country Always BalancesCountry Always Balances

(Contd…)(Contd…)• Eg : If X imports from Y, Y should also import from X. Hence, Eg : If X imports from Y, Y should also import from X. Hence, there would be a debit and credit entries in the balance of there would be a debit and credit entries in the balance of payments of both the countries X & Y.payments of both the countries X & Y.

• The individual items in the balance of payments may not The individual items in the balance of payments may not balance. But the total credits of the country must be equal balance. But the total credits of the country must be equal to its total debits.to its total debits.

• If there is any deficit in any individual account, it would be If there is any deficit in any individual account, it would be covered by a surplus in other accounts.covered by a surplus in other accounts.

• If there is any difference between total debits and total If there is any difference between total debits and total credits, it would be settled under credits, it would be settled under ‘‘errors & omissionserrors & omissions’’..

• Hence, in the accounting sense, the balance of payments of Hence, in the accounting sense, the balance of payments of a country always balances.a country always balances.

Balance of Payments (BOP) Account Balance of Payments (BOP) Account of a Countryof a Country

Balance of Payments (BOP) Account of a Balance of Payments (BOP) Account of a Country (Contd…)Country (Contd…)• The items 1 to 7 show the total receipts from all sources. The items 1 to 7 show the total receipts from all sources.

These receipts amount to Rs. 1000 Crores.These receipts amount to Rs. 1000 Crores.• The items 1(a) to 7(a) show the total payments on all The items 1(a) to 7(a) show the total payments on all

accounts. These payments amount to Rs. 990 Crores. When accounts. These payments amount to Rs. 990 Crores. When item 8 included, the total payment is Rs. 1000 Crores. Hence, item 8 included, the total payment is Rs. 1000 Crores. Hence, the total credit is equal to the total debit.the total credit is equal to the total debit.

• Thus the current a/c and capital a/c balance each other. Thus Thus the current a/c and capital a/c balance each other. Thus surplus in current a/c is equal to the deficit in the capital a/c. surplus in current a/c is equal to the deficit in the capital a/c. A deficit in current a/c is equal to the surplus in the capital A deficit in current a/c is equal to the surplus in the capital a/c.a/c.

• In the above given table, the balance of current a/c shows a In the above given table, the balance of current a/c shows a deficit of Rs. 200 Crores. But there is a corresponding surplus deficit of Rs. 200 Crores. But there is a corresponding surplus of Rs. 200 Crores in the balance of capital a/c.of Rs. 200 Crores in the balance of capital a/c.

• Hence, the credit and debit side balance & the balance of Hence, the credit and debit side balance & the balance of payments is in equilibrium.payments is in equilibrium.

Specific Uses of BOP for a Specific Uses of BOP for a Business ManagerBusiness Manager

• A study of a countryA study of a country’’s balance of payments can s balance of payments can help him in deciding whether he can help him in deciding whether he can borrow/raise funds in a particular country or borrow/raise funds in a particular country or invest his funds there.invest his funds there.

• A proper analysis of balance of payments data A proper analysis of balance of payments data can reveal trends in factors that underlie the can reveal trends in factors that underlie the value of the countryvalue of the country’’s currency in a foreign s currency in a foreign market.market.

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