Balance of Payments

Welcome to…Welcome to…Welcome

Welcome to…Welcome to…Balance of Payments

International Trade

International trade refers to trade between the residents of two different countries

International Trade

The exporter requires payment in the currency of the exporter’s country whereas the importer can pay only in the currency of the importer’s country

A need, therefore, arises for conversion of the currency of the importer's country into that of the exporter’s country

Foreign Exchange

Foreign exchange is the mechanism by which the currency of one country gets converted into the currency of another country

The conversion of currencies is done by banks who deal in foreign exchange

Foreign Exchange

The rate at which one currency is converted into another currency is the rate of exchange between the currencies concerned

The banks operating at a financial centre and dealing in foreign exchange constitute the foreign exchange market

Foreign Exchange as Stock

In another sense, the term foreign exchange is used to refer to the very balance held abroad

FEMA, 1999: foreign exchange includes foreign currency, balances kept abroad, instruments payable in foreign currency and instruments drawn abroad but payable in Indian currency

Balance of Payments

Balance of payments ( BOP ) is the systematic summary of the economic transactions of the residents of a country with the rest of the world during a specified time period, normally a year

Features of BoP Statement

Economic Transactions: • An economic transaction arises when

values are exchanged or moved between nations

• Theses may arise from:a. movement of goods in the form of exports and importsb. rendering of services abroad and using foreign services


Economic Transactions: c. Gifts/grants from one country to anotherd. Investments made abroad or received from abroade. Income on investments received from abroad or remitted abroadf. Increase/ decrease in the international reserves of the country


• Transactions between residents with Non-residents.

• A Flow Statement.

• Periodicity.

BoP Statement

In compilation of balance of payments, double entry principle of accounting is used

Currency Inflows – Credits( earn foreign exchange)

Currency Outflows – Debits ( expend foreign exchange)

BoP Statement

BOP statement is presented with three major components:

i) Current Accountii) Capital Accountiii) Official Reserve Account

BALANCE OFPAYMENTS

BALANCE OFPAYMENTS

CurrentAccount

CapitalAccount

Official ReserveAccount

Foreign Direct

Investment (FDI)

Unilateral transfers: Gifts, donations & subsidies

Portfolio Investment

Goods account: Exports & Imports

Services account: Travel, transportation, Insurance etc.

Private Short-term

Capital Flows

Decrease or increase in foreign exchange reserves

Investment Income : Interest, Dividends etc.

BOP Accounting

1. Export of goods USD 200 Mn. – realisation deposited in bank abroad

2. Import of goods USD 150 Mn. – payment made from bank account abroad

3. Amount spent by foreign tourists in the country USD 40 Mn.

4. Received goods as gift from another country USD 60 Mn.

5. Export of commodities for USD 80 Mn. On a government deal – payment in gold by the importing country’s government

Balance of Payments

(USD Million)

Credit (+) Debit

(-)

Balance

A. CURRENT ACCOUNT +170

1. Merchandise Trade 280 210 +70

2. Trade in Services 40 +40

3. Unilateral Transfers 60 +60B. CAPITAL ACCOUNT

Bank balances abroad 150 240 -90C. OFFICIAL RESERVE ACCOUNT 80 -80

Importance of BOP

a. Judge economic and financial status of a country in the short-term

b. Deficit signifies a tendency to take stiff measures for diminishing imports, exchange control and restrictions on repatriation of dividends/ interest

Importance of BOP

c. Consistent BOP deficit has an unfavourable effect on exchange rate – depreciation of the currency

d. Central bank intervenes through its regulatory stock to control volatility of exchange rate

Link between the National Economy & International Activities

National Income = Consumption + Savings

National Spending = Consumption + Investment

So,National Income – National Spending = Savings – Investment

If a nation’s income exceeds its spending, savings will exceed domestic investment

Link between the National Economy & International Activities

A nation that produces more than it spends will save more than it invests domestically and will have a net capital outflow

This capital flow will appear as a combination of capital account deficit and an increase in official reserves

India’s Overall Balance of Payments

(` crore)

Item 2009-10 PR 2010-11 P

Credit Debit Net Credit Debit Net

7 8 9 10 11 12

A. CURRENT ACCOUNT

I. MERCHANDISE 8,62,333 14,23,079 -5,60,746 11,39,517 17,34,545 -5,95,028

II. INVISIBLES (a+b+c) 7,74,512 3,94,392 3,80,120 8,99,484 5,06,990 3,92,494

Total Current Account (I+II) 16,36,845 18,17,471 -1,80,626 20,39,002 22,41,534 -2,02,532

B. CAPITAL ACCOUNT

1. Foreign Investment (a+b) 9,43,447 6,99,806 2,43,641 13,04,426 11,32,272 1,72,154

2. Loans (a+b+c) 3,49,720 2,88,047 61,673 4,86,050 3,59,057 1,26,993

3. Banking Capital (a+b) 2,92,105 2,82,261 9,844 4,19,277 3,97,252 22,025

4. Rupee Debt Service – 452 -452 – 313 -313

5. Other Capital 54,300 1,16,874 -62,574 45,781 93,507 -47,726

Total Capital Account (1to5) 16,39,572 13,87,440 2,52,132 22,55,534 19,82,401 2,73,133

C. Errors & Omissions – 7,269 -7,269 – 11,152 -11,152

D. Overall Balance (A+B+C)) 32,76,417 32,12,180 64,237 42,94,536 42,35,087 59,449

Source: Reserve Bank of India

Balance of Trade

The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period

It is the relationship between a nation's imports and exports

A positive balance is known as a trade surplus and a negative balance is referred to as a trade deficit or, informally, a trade gap

India’s International Trade



GOOD LUCK TO YOU

Education

Balance of Payments