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“BALANCE OF PAYMENTS……”

“BALANCE OF PAYMENTS……”. “TABLE OF CONTENTS”. Definition Purpose of BOP Structure of BOP Accounts Is BOP always in equilibrium? Disequilibrium in BOP Assessing the BOP Disequilibrium Causes of Disequilibrium Measures to correct adverse BOP. “DEFINITION”.

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“BALANCE OF PAYMENTS……”

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  1. “BALANCE OF PAYMENTS……”

  2. “TABLE OF CONTENTS” • Definition • Purpose of BOP • Structure of BOP Accounts • Is BOP always in equilibrium? • Disequilibrium in BOP • Assessing the BOP Disequilibrium • Causes of Disequilibrium • Measures to correct adverse BOP

  3. “DEFINITION” A systematic record of all economic transactions between the residents of a country and residents of foreign countries during a certain period of time.

  4. “PURPOSE OF BOP” • Provides extremely useful data for the economic analysis • Reveals the changes in foreign trade • Provides indications of future repercussions of country’s past trade performance • Invites government attention for corrective measures

  5. “STRUCTURE OF BALANCE OF PAYMENTS ACCOUNTS” The BOP of a country is constructed on the principle of double-entry book-keeping. In BOP accounts, debit and credit items are shown vertically and horizontally they are divided into three categories: • Current Account • Capital Account • Official Settlements Account

  6. CURRENT ACCOUNT : It consists of all transactions relating to trade in goods and services and unilateral transfers. • CAPITAL ACCOUNT : It consists of its transactions in financial assets in the form of short-term and long-term lendings and borrowings, and private and official investments. • OFFICIAL SETTLEMENTS ACCOUNT : It is in fact a part of capital account. It measures the change in nation’s liquidity and official reserve assets during the year.

  7. Balance of Payments Account

  8. “IS BOP ALWAYS IN EQUILIBRIUM?” BOP is written as : B= Rf-Pf Where, B = Balance of Payments Rf = Receipts from foreigners Pf = Payments made to foreigners When B=Rf-Pf=0, the BOP is in equilibrium Rf-Pf>0, there is surplus in the BOP Rf-Pf<0, there is deficit in the BOP Any positive balance in a country’s current account is exactly offset by negative balance on its capital account and vice versa. Thus, in the accounting sense, the BOP always balances.

  9. “DISEQUILIBRIUM IN BOP” When the total receipts do not match with total payment obligations of the accounting period, this is a position of disequilibrium in the balance of payments.

  10. “ASSESSING THE BOP DISEQUILIBRIUM” For the purpose of assessing the overall BOP position of the country, all the transactions are regrouped under the following two categories:- • Autonomous Transactions • Accommodating Transactions

  11. “CAUSES OF DISEQUILIBRIUM” • Temporary Changes (or Disequilibrium) • Fundamental Disequilibrium • Structural Changes (or Disequilibrium) • Changes in Exchange Rates • Cyclical Fluctuations (or Disequilibrium)

  12. Contd…… • Changes in National Income • Price Changes • Stage of Economic Development • Capital Movements • Political Conditions

  13. “IMPLICATIONS OF DISEQUILIBRIUM” • A deficit in the combined current and capital accounts is regarded as undesirable for the country. • A current account deficit in BOP of a country may have either good or bad effects depending on the nature of an economy.

  14. “MEASURES TO CORRECT ADVERSE BOP” • Adjustment through Exchange Depreciation (Price Effect) • Devaluation or Expenditure-Switching Policy • Direct Controls • Adjustment through Capital Movements

  15. Contd……. • Adjustment through Income Changes • Stimulation Of Exports and Import Substitutes

  16. Thank You…..

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