Balance of Payment & Macroeconomic Management

Balance of Payments
Reserve Bank Of India, a Statistical Statement that systematically summarizes, for a specific time period, the economic transaction with the rest of the world.

Balance of Trade & Balance of Payments

Balance of trade takes into account only those transaction arising out of the exports and import of the visible items. BOP include Visible as well as Invisible Items. Hence, BOP represents a better picture of a countrys economics and financial transactions with the rest of the world than the balance of trade.

Nature of Balance of Payments Accounting

The Balance of Payments is the statistical record of a countrys international transactions over a certain period of time presented in the form of double-entry bookkeeping. The BOP of a country is a summarized record of different types of economic transactions that occurred during a specified period(usually an Accounting Year) between the residents of the country and the rest of the world. In other words, the BOP is the summary of the international transactions of the country and is designed to show the OVERALL BALANCE or the difference between international receipts and payments of the country.

Nature of Balance of Payments Accounting

A countrys balance of payments accounts keep track of both its payments to and its receipts from foreigners. Any transaction resulting in a payment to foreigners is entered in the balance of payments accounts as a DEBIT and is given a negative () sign. Any transaction resulting in a receipt from foreigners is entered as a CREDIT and is given a positive (+) sign.

Nature of Balance of Payments Accounting

The key Components of Balance of Payment Account:

The Current Account (known as CA) The Capital Account (known as KA) Statistical Discrepancy / Errors and Omissions Overall Balance (Surplus or Deficit) The Official Reserves Account (Monetary Movements)

1. The Current Account:

Includes all imports and exports of goods and services, Includes investment income, Includes unilateral transfers of foreign aid/grant. If the debits exceed the credits, then a country is running a Trade Deficit and if the credit exceed the debit balance means a country is having Trade Surplus. In the CA the export of goods is shown as CREDIT transaction with PLUS SIGN while the import of goods is shown as DEBIT transaction with MINUS SIGN. Difference between import and export known as Balance Of Trade or Trade Balance.

1. The Current Account: Contd

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Unlike the trade in goods, the other components of CA, namely Services, Investment Income and Unilateral Transfers, are not physically visible, hence sometimes they are clubbed together in the CA as Invisibles. Export and Import of services may include Transportation, Insurance etc.. Travel,

Investment Income is the second item of CA, which includes income receivable or payable on investments in home/foreign country by the way of interest or dividend.

1. The Current Account: Contd

Unilateral Transfer is the third item of CA, which includes transfer of money without any reciprocal transfer of goods and services. UT may be Private or Official. Official Transfer includes Gifts/Grants/Monetary Relief/ Aids by Indian Govt. to other Govts. Or residents of other countries. Private Transfer means contributions/gifts by Indians to foreign charitable agencies or transfer of funds by migrant workers in other countries to their relatives in India. When all the above items of the CA are combined, the CA may show Surplus or Deficit.

2. The Capital Account:

The capital account shows the receipts and payments of capital funds between India and the rest of the world. The capital account measures the difference between Indian sales of assets to foreigners and Indian purchase of foreign assets. The capital account is composed of
Foreign Investments (FDI + Portfolio Investments) Loans (External Assistance + Commercial Borrowings) Banking Capital

3. Statistical Discrepancy/Errors and Omissions:

Theres going to be some ERRORS/OMISSIONS and MISRECORDED transactionsso we use a plug figure to get things to balance. The statistical data required for presentation of BOP is collected partly from official records of regulatory/Govt bodies like RBI and partly on the basis of some estimates. So that the total debit and credit is unlikely to MATCH, this refers to Statistical Discrepancy or Errors and Omissions in BOP. Such things arise due to data inadequacy and incorrect reporting.

4. Overall Balance of BOP:

It is the difference between the inflow and outflow of funds when the transactions in the Current Account, and Capital Account are combined with the figures of the Errors and Omissions in the BOP statement. The overall balance can be positive or negative which represents Overall Surplus or Overall Deficit. The Overall Balance may show deficit or surplus depending on whether the total debits exceed the total credits or vice versa.

5. The Official Reserves Account

(Sometimes called as Monetary Movements)

The step FIVE is all about Official Reserve Account or Monetary Movements which includes IMF and Foreign Exchange Reserves. The DEFICIT OR SURPLUS in Overall Balance has to be adjusted through Monetary Movements of the country. The adjustment may be effected through IMF transactions OR through increase / decrease in Foreign Exchange Reserves of the Country. Official (Govt./Country) Reserves Assets include Gold, Foreign Currencies, SDRs, Reserve Positions in the IMF.

A. IMF and SDR:

IMF stands for International Monetary Fund, and SDR stands for Special Drawing Rights.
The IMF has created a reserve asset termed as SDRs (Special Drawing Rights) which are allocated to member countries. The SDR may be held as reserves by member countries and used for settling international payments between countries. A country facing OVERALL DEFICIT in BOP may purchase SDR from the IMF for meeting the Deficit. It means inflow of funds under monetary movements. A country having OVERALL SURPLUS in the BOP may repay SDR to the IMF, means outflow of funds.

Balance of Payment Disequilibrium

Economic Factors
Development Disequilibrium Cyclical Disequilibrium Secular Disequilibrium Structural Disequilibrium

Political Factors Sociological Factors Natural Factors

Correction of Disequilibrium
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Automatic Correction Deliberate Measures

Monetary Measures
Monetary Contraction Devaluation Exchange Control

Trade Measures
Export Promotion Import Control

Miscellaneous Measures