Balance Of Payment

1. Balance Of Payment

2. BOP BOP of a country is a systematic record of its receipts and payments in international transaction in a given year. The balance of payment is merely a way of listing receipts and payments in international transactions for a country.

3. BOP The BOP account of a country is constructed on the principle of double entry bookkeeping. Each transaction is recorded in the credit and debit side of the statement. Unlike Balance Sheet – credit – left side debit - right side Payment received from a foreign country ----credit transaction Payment to a foreign country ------ debit transaction

4. Credit side • Export of goods & services, • transfer receipts in the form of gifts etc from foreigners • Borrowings from abroad • Investment by foreigners in the country • Official sale of reserve assets including gold to foreign countries • International agencies

5. Debit side • Import of goods and services • Transfer payments to foreigners • lending to foreign countries • Investment by residents to foreign countries • And official purchase of reserve assets or gold from foreign countries and international agencies

6. BOP A/c • Current Account Exports Goods Services Transfer receipts • Capital Account Borrowings from foreign countries Direct Investment by foreign countries • Official Settlement Account Increase in foreign holdings Errors & Omissions • Current Account Imports Goods Services Transfer payments • Capital Account Lending to foreign countries Direct Investment s in foreign countries • Official Settlement Account Increase in official reserves of goods and foreign countries Errors & Omissions Credits + Debits -

7. Is Balance of Payment always be in equilibirium There exist a deficit or surplus in the balance of payments R f - Pf > 0 ---- surplus in the BOP R f - Pf < 0 ---- deficit in the BOP R f - Pf = 0 ---- equilibrium

8. Causes of disequilibrium • Temporary disequilibrium – random variations in trade, seasonal fluctuations, the effects of weather on agricultural production, etc. • Chronic/fundamental disequilibrium - fundamental changes in the economic condition due to changes in the consumer changes with in the country and abroad thereby affecting the country’s export and import. • Technological changes • Changes in the country’s national income • Inflation • Stage of economic development • Borrowings and lendings by countries

9. Measures to correct the imbalances in BOP Monetary measures • Devaluation • Deflation • Adjustment through Exchange depreciation • Exchange control Non monetary measures import control, export promotion, tariff, quota, bilateral agreements and state trading