Balance of Payments

Introduction:

Every business/firm prepares its annual final accounts and balance sheet of its transactions with the rest of the society with a view to knowing its Profit or loss and assets and liabilities. Lly, every nation carrying out economic transactions with foreign countries Prepares its balance of Payment accounts periodically with a view to taking stock of its assets and liabilities & its receipts from and payment obligations to the rest of the world.

Definition & Importance of BOP:

A systematic record of all economic transactions between the residents of a country and residents of foreign countries during a certain period of time is called balance of payment. The System of recording the economic transactions is double entry bookkeeping system. Economic transactions include all such transactions that involve the transfer of title or ownership. While some transactions involve physical transfer of goods , services, assets and money along with the transfer of title, some transactions do not.

Uses of BOP:
It Provides an extremely useful data for the economic analysis of the countrys weakness & strength as a Partner in international trade. BOP also reveals the changes in the composition and magnitude of foreign trade. BOP also Provides indications of future repercussions of countries Past trade Performances.

BOP Accounts:
There are two broad categories of BOP Transactions: Current transactions: It Pertain to export & Import of goods & services that change the current level of consumption in the country or bring a change in the current level of national(money) income.

Capital transaction: are those transactions which increase or decrease a countrys total stock of capital , instead of affecting the current level of consumption or national income.

In accordance with the two kinds of transactions, BOP accounting is divided into two major accounts: Current A/c Capital A/c.

Current Account:
Current account can be further grouped as: 1) Visible items(export & Import of goods) 2) Invisible items(all other items in the current account payment & receipt for the services such as banking , insurance and shipping etc.)

But , sometimes another category called unrequired Transfer is created to give a separate treatment to the items like gifts , donations, military aid , technical assistance etc.

Capital Account:
Broad categories of capital account items are a) Short-term capital movement b) Long-term capital movement c) Changes in the exchange reserves

Short-term capital movement

I.Purchase

of Short-term securities such as treasury bills, commercial bill &acceptance bill II.Speculative purchase of foreign currency III.Cash balances held by foreigners for reason as fear of war, political instability & so on

Long-term capital movements

I.

II.

Direct investments in shares bonds and in real estate and physical asset such as plant, building, equipment & so forth in which investors hold a controling power Portfolio investment in stocks & bonds such as government securities, securities of firms not entitling the holder with controlling power