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BALANCE OF PAYMENT. Chapter 3. BOP. It is the systematic summary of the economic transactions of the residents of a country with the outsiders. An economic transaction arises when values are exchanged or moved between nations. Features. Economic transaction-. Export and import

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BOP

  • It is the systematic summary of the economic transactions of the residents of a country with the outsiders.

  • An economic transaction arises when values are exchanged or moved between nations.



Economic transaction
Economic transaction-

  • Export and import

  • rendering of services,

  • gift & grants from one country to another,

  • Investments made or received

  • Increase or decrease in international reserves


Resident with non residents
Resident with non residents

  • Residents may mean individuals, institutions, corporate bodies, government departments, branches or units of MNCs


A flow statement
A flow statement

  • It is compilation of flow of economic transaction of the country during the period and not a statement of the position as on date.


Periodicity
Periodicity

  • It is prepared of one year.



I current account
I) Current account

  • It covers all transactions between residents & non residents, other than financial items.


1 merchandise trade
1) Merchandise trade

  • It represents exports and imports of commodities from / into India.

  • The credit in the item represents exports and debit represents imports.

  • The net balance, being the difference between exports and imports is known as balance of trade.



2 invisibles
2) Invisibles the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

  • A) Services

    • Travel

    • Transportation

    • Insurance

    • Miscellaneous

  • B) Transfers

    • Official

    • Private

  • C) Investment income


  • Ii capital account
    II) Capital account the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • It represents transfer of money and other capital items and changes in the country’s foreign assets and liabilities resulting from the transactions recorded in current account.


    • 1. Foreign investment the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

      • In India

        • Direct

        • Portfolio

      • Abroad

    • 2. Loans

      • External assistance

        • By India

        • To India

      • Commercial borrowings

        • By India

        • To India

      • Short term to India

    • 3. Banking capital

      • Commercial banks

        • Assets

        • Liabilities

        • Non residents deposits

      • Others

    • 4. Rupee debts service

    • 5. Other capital


    Iii official reserve account
    III) Official reserve account the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • Official reserves are government owned assets.

    • The official reserve account represents only purchases and sales by the central bank of the country.


    Example
    Example.. the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • If a country has a BOP deficit, the central bank will have to either run down its official reserve assts such as gold, foreign exchange and SDR or borrow fresh from foreign central banks.

    • Or if a country has a BOP surplus, its central bank will either acquire additional reserve assts from foreigners or retire some of its debt.


    Bop accounting principles
    BOP accounting principles.. the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.


    Credit transactions
    Credit transactions (+) the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • Are receipts of payment from foreigners.

    • Like-

    • Exports of goods or services

    • Unilateral transfers (gifts) received from foreigners

    • Capital inflows


    Capital inflows
    Capital inflows the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • It can take either of the two forms-

    • An increase in foreign assts of the nation.

    • A reduction in the nation’s assets abroad.


    Example1
    Example.. the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • A US resident purchases an Indian stock. This is a capital inflow to India because it involves the receipt of a payment from a foreigner and thus foreign assets in India go up.

    • When an Indian resident sells a foreign stock. This is a capital inflow to India because it involves receipt of a payment from a foreigner, thus Indian assts abroad decreases.


    Debit transactions
    Debit transactions (-) the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • Are the payment of foreign exchange.

    • Like-

    • Imports of goods and services

    • Unilateral transfers (gifts) made to foreigners

    • Capital outflows


    Capital outflow
    Capital outflow the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • It can take either of the two forms-

    • An increases in the nations assets abroad.

    • A reduction in foreign assets abroad.


    Example2
    Example the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • Purchase of a UK t –bill by an Indian resident. This results in an increase in the Indian assets abroad & is a debit transaction since it involves a payment to foreigners.

    • Sale by a US firm of an Indian subsidiary. This results in reduction in foreign assets in India and is entered as a debit transactions.


    Bop disequilibrium
    BOP disequilibrium the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • BOP is said to be in equilibrium when the demand for foreign exchange is exactly equivalent to the supply of it.

    • It is at disequilibrium when it shows either a surplus or deficit.

    • There will be deficit in BOP when the demand for foreign exchange exceeds its supply, and there will be a surplus when supply for foreign exchange exceeds the demand


    Factors
    Factors.. the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • 1) Economic

      • Development disequilibrium

      • Cyclical disequilibrium

      • Secular disequilibrium

      • Structural disequilibrium

    • 2) Political

    • 3) Social


    Correction of disequilibrium
    Correction of disequilibrium the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.


    • Monetary the period exceed its aggregate import, the balance of trade is said to be favorable or surplus or positive and vice a versa.

    • contraction/ expansion

    • 2. Devaluation/

    • Revaluation

    • 3. Exchange control

    • Foreign loans

    • 2. Incentives for

    • foreign investments

    • 3. Tourism

    • development

    • 4. Incentives for

    • foreign remittances

    • 5.Import substitution

    Export promotion

    • Abolition / reduction

    • of export duties

    • 2. Export subsidies

    • 3. Export incentives

    Import control

    • Import duties

    • Import quotas

    • Import

    • prohibition


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