Balance of Payments

Presented by: Anuradha

Meaning..
Balance of payment is defined as a systematic

record of all economic transactions between the residents of a country and residents of foreign countries during a period of time. The term systematic record does not refer to any particular system. However, the system generally adopted is double entry book-keeping system. economic transactions include all such transactions involve physical transfer title or ownership.

Purpose of BOP
It provide an extremely useful data for the

economic analysis of countrys weakness and strength as a partner in the international trade. Reveals the changes in the composition and magnitude of foreign trade. It provides indications of future repercussions of countrys past trade performances. It invites government attention to the needs of corrective measures against the weak spots and unhealthy developments.

Components of BOP
The economic transactions between a country

and the rest of the world may be grouped under two broad categories: i. Current transactions: export and import of merchandise and services. ii. Capital transactions: which increase or decrease a countrys total stock of capital. In accordance with the two kinds of transactions BOP is divided in two major accounts: a) Current accounts; and b) Capital accounts.

Components of current account

Current Account Rupees in Crores Credits Debits Net I. Merchandise (i) Private (ii) Government II. Non-monetary Gold Movements III. Invisibles (i) Travel (ii) Transportation (iii) Insurance (iv) Investment Income (v) Govt. not included elsewhere (vi) Miscellaneous (vii) Transfer Payments (a) Official (b) Private Total Capital Account (I+II+III)

Components of capital account

Capital Account Rupees in Crores

Credits Debits Net I. Private (i) Long Term (ii) Short Term II. Banking III. Official (i) Loans (ii) Amortisation- The act of repaying a loan in regular payments over a given period of time. (iii) Miscellaneous Total Capital Account (I+II+III)

Disequilibrium in BOP
Though the credit and debit are written balanced

in the balance of payment account, it may not remain balanced always. Very often, debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account. Such an imbalance is called the disequilibrium. Disequilibrium may take place either in the form of deficit or in the form of surplus.

Causes of disequilibrium in BOP

Population Growth- Most countries experience an

increase in the population and in some like India and China the population is not only large but increases at a faster rate. To meet their needs, imports become essential and the quantity of imports may increase as population increases.
Development Programmes- Developing countries

which have embarked upon planned development programmes require to import capital goods, some raw materials which are not available at home and highly skilled and specialized manpower. Since development is a continuous process, imports of these items continue for the long time landing these countries in a balance of payment deficit.

 Demonstration Effect-When the people in the less developed

countries imitate the consumption pattern of the people in the developed countries, their import will increase. Their export may remain constant or decline causing disequilibrium in the balance of payments. Natural Factors- Natural calamities such as the failure of rains or the coming floods may easily cause disequilibrium in the balance of payments by adversely affecting agriculture and industrial production in the country. The exports may decline while the imports may go up causing a discrepancy in the country's balance of payments. Cyclical Fluctuations- Business fluctuations introduced by the operations of the trade cycles may also cause disequilibrium in the country's balance of payments. For example, if there occurs a business recession in foreign countries, it may easily cause a fall in the exports and exchange earning of the country concerned, resulting in a disequilibrium in the balance of payments. Inflation- An increase in income and price level owing to rapid economic development in developing countries, will increase imports and reduce exports causing a deficit in balance of

 Poor marketing strategies- The superior marketing of the

developed countries have increased their surplus. The poor marketing facilities of the developing countries have pushed them into huge deficits.

Flight of capital- Due to speculative reasons, countries may lose foreign exchange or gold stocks People in developing countries may also shift their capital to developed countries to safeguard against political uncertainties. These capital movements adversely affect the balance of payments position. Globalisation- Due to globalisation there has been more liberal and open atmosphere for international movement of goods, services and capital. Competition has beer increased due to the globalisation of international economic relations. The emerging new global economic order has brought in certain problems for some countries which have resulted in the balance of payments disequilibrium.

Measures to correct BOP

The policy measures that are generally adopted

to correct the BOP disequilibrium can be classified as follows: 1. Indirect measures to correct BOP; and 2. Direct measures to correct BOP

Indirect measures
These are further divided into two kinds:

Income measures: it deals with how reduction in income can lead to reduction in balance of payments. a) Monetary policies: tight money policy or dear money policy is adopted. b) Fiscal policy: fiscal policy as a tool of changing household incomes includes variation in (1) taxation (2) public expenditure.
i.
ii.

Price measures: reducing demand for imports through prices measures requires changing the relative prices of imports and exports. Relative prices of imports and exports can be changed through (a) exchange depriciation and (b)

Direct measures- Exchange Control

The exchange control refers to a set of

restrictions imposed on the international transactions and payments, by the government or the exchange control authority. Exchange control may be partial, confined to only a few kinds of international transactions, or total depending on the requirement of the country.