Balance of Payments

Balance of Payment Balance of Trade & Balance of Payment are concepts related to

International Trade Balance of Trade is a record of goods or merchandise i.e.

Includes only visible items Balance of Payment is a comprehensive record of all transactions

of a country with other countries during a given year i.e. Includes both visible & invisible items – goods & services

Prof Kindleberger; BOP is the systematic record of all economic transactions between the residents of the reporting country & residents of foreign countries

Structure of BOP It has two sides i.e. Payments & Receipts

Structure of BOP BOP is broadly classified in 3 accounts i.e. Current A/C,

Capital A/C & Reserve A/C First 4 items are of Current A/C i.e. records of export &

import of goods & services & unilateral transfers Unilateral Transfers refer ti items that have no correspinding

receipt or payment i.e. Donations, Remittances, Gifts etc. Capital A/C is category 5 & 6 Reserve A/C is category no. 7 it is maintained by Central

bank in terms of gold, foreign currencies

Difference between BOT & BOP

Disequilibrium in BOP Disequilibrium in BOP can be of 2 types i.e. Either

Surplus or Deficit Surplus BOP is when receipts are more than

payment and in Deficit when payments are more than receipts

Disequilibrium in BOP can be explained in 2 terms i.e. Autonomous & Accommodative Transactions

Disequilibrium in BOP Autonomous Transactions - A transaction undertaken in

normal course of Business. Includes all Exports & Imports of goods & services. Transactions are profit motivated. It does NOT take into A/C the equilibrium aspect of BoP – Termed as Above the line transactions

Accommodative Transactions - Transaction undertaken with the specific intention of adjusting the imbalance arising out of other transactions. Not profit oriented – Termed as below the line transactions

Causes of Disequilibrium Development

Projects Trade Cycles Growth in Population Demonstration Effect Trade barriers

Capital Transactions Technological

Advancement Inflation Political Instability Lack of Co-operation

Types of Disequilibrium Cyclical Disequilibrium

Prosperity, Recession, Depression & Recovery Structural Disequilibrium

Change in Taste, Technological advancement, war or natural calamities etc.

Short Run Disequilibrium 1 – 2 years – failure of monsoon, industrial strike etc.

Long Run Disequilibrium Fundamental disequilibrium – change in population, hike in oil

prices, increase in imports

Methods to Correct Disequilibrium

Monetary Methods Non-Monetary Deflation Exchange Depreciation – 1$

= 50 then 1$ = 60 Devaluation Exchange Control –

restrictions on the usage of forex – to have strict imports

Tariffs Quotas Export Promotion Import

Substitution

Questions 1. Explain BoP & its structure 2. Short Note – Distinguish between BOT & BoP 3. Explain Disequilibrium in BoP & its types 4. Throw light on the causes of disequilibrium of

BoP5. Explain Monetary Method to correct

Disequilibrium 6. Explain Non - Monetary Method to correct

Disequilibrium