Balance of

Payments
Presented by
Dr. Rohit Tomar
 Contents
Meaning
Objective
Characteristics
Structure
Components
Balance of payments Surplus and Deficit
Ways of Measuring of Deficit and Surplus
Meaning of disequilibrium in balance of payments
Causes of disequilibrium in balance of payments
Measures to correct disequilibrium in Balance of
Payments
 Balance of Payments
A record of
international
transactions
between
residents of one
country and the
rest of the world
 Objective
Its main objective is to represent the
economic position of a country,
whether its currency is rising or
falling in its external value.
 Characterstics of Balance
of Payments
It is statement having two sides.
It is a record of economic transaction.
It shows a relation between receipts
& payments.
Visible & Invisible items both are
included in this statement.
It is prepared for a certain period of
time.
 Structure of balance of
payments accounts
The balance of payments account of
a country is based on the principle of
double-entry book-keeping.
Each transaction is entered on the
credit and debit side of statement.
But balance of payments accounting
differ from business accounting in
one respect. In business accounting,
debit(-) are shown on the left side
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and credits (+) on the right side of
statement . But in the balance of
payments accounting, debits are shown
on the right side and credits on the left
side of the statement. For example:
When a payment is received from a
foreign country, it is a credit
transaction while payment to a foreign
country is a debit transaction.
Components of Balance of
payments
Current Account
Capital Account
Official Account
Current Account- The current
account of a country consists of all
transactions related to trade in
goods and services and unilateral
transfers.
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Capital Account- The capital account
of a country consist of its transaction
in financial assets in the form of
short-term and long-term lending
and borrowing.
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Official Settlement Account
In fact it is a part of capital account.
But in UK and USA balance of payments
accounts shows as a separate account.
It measures the change in nations
liquid and non liquid liabilities to
foreign official holders and the change
in nations official reserve assets.
 Table. Balance of Payments
account
Credits(+) (Receipts) Debits(-)Payments
Current Account
Exports Imports
(a) Goods Goods
(b) Services Services
(c) Transfer payments Transfer payments

Capital Account
Borrowing from Lending to Foreign Countries

Foreign countries
Direct Investments
By Foreign countries Direct Investments in Foreign
countries
Official Settlements Account
Increase in Foreign Official Holdings Increase in Official Reserve
of Gold and Foreign
Currencies
Errors and Omissions
 Major items of Indias
Balance of Payments (US$
Million) 2007-08(PR) 2008-09(P) April-Dec(2008-09)
(PR)
April-Dec(2009-2010)
(P)

Export 166163 175184 150520 124473

Import 257789 294587 248967 213988
Trade Balance -91626 -119403 -98446 -89515
Invisible,net 74592 89587 70931 59185
Current Account -17034 -29817 -27516 -30330
Balance

Capital Account* 109198 9737 7136 41630

Change in Reserve -92164 20080 20380 -11330

Source: Reserve Bank of India Report

Trade balance For example
Debit: Sun Microsystems buys LCDs from Hong Kong.
Credit: Singapore Airlines buys Boeing jet.
Trade in services
Debit: American rents an apartment in Singapore.
Credit: TUI - Germany places an ad in the NYT.
Income payments
Debit: Honda US pays dividend to Honda Japan.
Credit: Bank Austria pays salary to rep in NY office.
Unilateral Current Transactions
Debit: Peace Corps pays US volunteer teachers in Bosnia.
Credit: TotalFina pays tuition of employee for Stern MBA.
BOP Surplus and Deficit
What is BOP Surplus ?
What is BOP Deficit ?
 Ways Of Measuring of
Deficit or Surplus
Basic balance
Net liquidity balance
Official settlement balance.
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Basic balance- which includes the
current account balance and long-
term capital account balance
Net-liquidity balance- which includes
basic balance and short-term non
liquid balance, allocation of SDRs.
Official settlement account-It
includes total net liquid balance and
short term liquid balance.
 Meaning of disequilibrium
in balance of payments
A countrys balance of payments is
in disequilibrium when there is no
perfect equality between the
demand and supply for foreign
exchange.
Causes of disequilibrium in
balance of payments
Temporary causes
National Income
Inflation
Economic Development
Borrowing and Lending
Change in exchange rate
Political factors-like instable govt.
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Temporary Causes- Temporary causes

may arises due to variations in the
trade, effect of weather on agriculture
production etc.
National Income - Another cause is
the change in countrys national
income. If the national income of a
country increases, it will lead to an
increase in imports thereby creating a
deficit in balance of payments.
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Inflation- Inflation is another cause
of disequilibrium in the balance of
payment. If there is inflation in the
country prices of exports increase,
thus increase in export prices
leading to decline in exports and rise
in imports result in adverse.
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Economic Development- A countrys
balance of payments also depends
on its stage of economic
development. If a country is
developing it will have a deficit in its
balance of payments.
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Borrowing and lending- A country
which gives loans and grants on a
large scale to other countries has a
deficit in its balance of payments on
capital account. On the other hand, a
developing country borrowing large
funds from other countries may have
a favourable balance of payments.
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Change in exchange rate This change
arise due to change in exports and
imports. If exports of the country are
more then imports the demand for its
currency increase so that the rate of
exchange moves in favours. On the other
hand if imports are more than exports
the demand for the foreign currency
increase and the rate of exchange will
against the country.
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Political factors like instable govt.
Lack of export substitution
More imports
Measures of disequilibrium
in balance of payments
Full convertibility of rupee
Export promotion
Import substitution
Export oriented units
Special economic zones
Devaluation of Currency
Improvement in advance licensing
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Foreign loans
Encouragement to foreign
investment
Incentives to tourism