Balance of Payments

Introduction
BOP Definition " Systematic statement
of all economic transaction of a
country with the rest of the world
during a period of time usually one
year.
A systematic accounting of all
economic transactions between the
residents of a nation and the rest of
the world during a period of time,
usually one year.
Balance of Trade
BOT = Net Balance of visible trade
= Export (X) Import (M)
If X> M Trade Surplus
If M>X Trade deficit Balance of Trade
Components of BOP

The Capital Account

The Current Account

The Official Reserve Account
The Capital Account
Capital Account - Commercial Borrowings
,IMF borrowings, non-residents deposits,
external assistance .
Short term capital movements include: -
Purchase of short-term securities -
Speculative purchase of foreign currency -
Cash balance held with foreign countries
Long term capital movements include: -
Direct investments in shares, bonds, real
estate, plant, building etc - Portfolio
investment like govt. securities, securities of
firms - Amortization of capital, repurchase
and resale of securities to FDIs.


The Current Account
Current Account It includes the export and
import of goods & services.

Goods - a change of ownership from/to a
resident (of the local country) to/from a non-
resident (in a foreign country) has to take place.
Movable goods include general merchandise,
goods used for processing other goods, and
non-monetary gold.
Services - These transactions result from an
intangible action such as transportation,
business services, tourism, royalties or
licensing.





The Current Account
Income - Income is money going in (credit)
or out (debit) of a country from salaries,
portfolio investments (in the form of
dividends, for example), direct investments
or any other type of investment.

Current Transfers - Current transfers are
unilateral transfers with nothing received in
return. These include workers' remittances,
donations, aids and grants, official
assistance and pensions.





Current account balance
(CAB)
X = Exports of goods and services
M = Imports of goods and services
NY = Net income abroad
NCT = Net current transfers

The formula is:
CAB = X - M + NY + NCT




The Official Reserve Account
Official Reserve Account It covers all
purchases and sales of international
reserve assets such as dollars, foreign
exchange, gold and Special Drawing
rights(SDRs)
Function:
1. Measures changes in international
reserves owned by central banks.
2.) Reflects surplus/deficit of
a.) Current account
b.) Capital account



BOP Disequilibrium
BOP statements are prepared on the
principles of accounting .
There is often a surplus or deficit in BOP
This is called Disequilibrium in BOP.
Methods to correct
Disequilibrium
Deflation
Depreciation
Devaluation
Exchange Control
Financing of BOP deficit
Financing of BOP deficit
However, a small imbalance should not
be cause for concern; persistent large
imbalances are more worrying.
Large and persistent deficits can be a
problem because there is a need to
finance the increasing expenditure on
imports, usually through loans from
abroad (which show as a surplus on the
financial account);
having large debts, especially with
creditors abroad, can be problematic
when those creditors want their money
back or decide to discontinue lending.