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Balance of Payment One Shot

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2K views18 pages

Balance of Payment One Shot

Uploaded by

shubham18093
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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BALANCE OF

PAYMENTS
ONE SHOT
XII Macro Economics
2022-2023
SUNIL PANDA- THE EDUCATOR
SUNIL PANDA COMMERCE CLASSES
Balance of Trade It is the difference between the value of goods exported and
value of goods imported.
BOT = Export value – Import value [Only Tangible/ Visible goods]
It is a Narrow concept as Compared to Balance of payments.
Balance of Trade may be
(i) Surplus BOT (exports > imports)
(ii) Deficit BOT (imports > exports)
(iii) Equilibrium BOT (exports = imports).
BALANCE OF PAYMENTS

It is a statement that records all


economic transactions of a
country with rest of the world.
Balance of payments includes the following

01 Visible items 03 Capital transfers

04 Unilateral transfers
02 Invisible items

SUNIL PANDA COMMERCE CLASSES


(i) Visible items: It includes all types of physical goods exported & imported.
These are seen crossing the borders. e.g. Machines and many other
tangible goods.
(ii) Invisible items: Which include all types of services. These are invisible like
Banking Services, shipping services, insurance services, etc.
(iii) Unilateral transfers: These are one way transfers of money, goods or
services from one country to another. These are transfer for free e.g. gifts,
grants, donations, aid to flood victims, etc.
(iv) Capital transfers: Which are connected with capital receipts and capital
payments. These involves transfer of capital Assets
Balance of Payment have two Accounts
Nature of controlling

Current Capital
Account in Account in
BOP BOP
Current Account in Balance of payment
It is that account in BOP which records export and import of goods, services
and unilateral transfers.
Components of current account in a BOP

(i) Export and import of goods:


It records export and import of tangible
goods like Machineries etc. (visible
items). All export of goods are
recorded as credit item or (+) items as
these results inflow of foreign
exchange in to our country. While all
import of goods are recorded as debit
item or (–) items as these results
outflow of foreign exchange from our
country
(ii) Export & import of services:
It records export and import of services i.e.
invisible items. Which is not seen as crossing
the borders. Services are split into two
components (i) factor services (ii) non factor
services. Factor services involve payments in
terms of income like compensation of
employees. Non-factor services like
shipping, insurance, banking, involve
payments in terms of revenue. So all export
of services are recorded as credit item or (+)
items as these results inflow of foreign
exchange where as all import of services are
recorded as debit item or (–) item because it
results outflow of foreign exchange.
(iii) Unilateral transfers:
It also records current transfers. It refers
to “transfer for free” these are unilateral
transfers by way of gift, grant, donations
etc. So receipt of unilateral transfers are
recorded as credit item or (+) items
because it results inflow of foreign
exchange in to our country. Whereas
payment of unilateral transfers are
recorded as debit item or (–) items
because it results outflow of foreign
exchange from our country.
Net value of these 3 items (i) visible (ii) invisible (iii) unilateral transfers
are recorded current account in BOP
(ii) Capital Account in BOP It is that account of BOP which records all such
transactions between resident of a country and rest of the world which cause a
change in Assets or liabilities of the Resident of a country or its government.
Components of Capital Account in BOP

01 Foreign Investments

02 Borrowings / Loans

03 Change in foreign exchange reserves

SUNIL PANDA COMMERCE CLASSES


Foreign Investment has Two sub component:
(a) Foreign direct investment (FDI): It refers to the purchase of assets in the
rest of the world which allows control over that assets. e.g. Purchase of a
firm by TATA in rest of the world. After purchase TATA has full control over
that firm.
(b) Portfolio investment (foreign institutional investment): It refers to purchase
of an asset in rest of the world, without having any control over that asset.
e.g. Purchase of some shares of a foreign company by TATA, FDI and
Portfolio investment are non-debt creating capital transactions. FDI or
portfolio investment by the non-residents in our country is recorded as
credit item or (+) items because it results inflow of foreign exchange in to
our country whereas, FDI or Portfolio investment by resident in rest of the
world is recorded as debit item or (–) items because it results outflow of
foreign exchange from our country
(ii) Borrowings / Loans has two sub components.
(a) Commercial Borrowings: It refers to borrowings by a country (including
government & private sector) from international money market.
(b) Borrowing from international monetary fund (IMF): It refers to borrowing by
a country with consideration. It involves lower rate of interest as compared
to market rate. All the borrowings are debt creating capital transactions
loan from rest of the world are recorded as credit side, (+) items because
this leads to inflow of foreign exchange in our country. Whereas loan to rest
of the world is recorded as debit side, (–) items because outflow of foreign
exchange from our country.
(iii) Change in foreign exchange reserves/ Official reserves: Foreign exchange
reserves are the financial assets held as reserve by a Central Bank in foreign
currencies. A change in foreign exchange reserve affects the balance of
payments. Any withdrawn from the reserve are considered as a credit item or
(+) item and any addition to these reserves are considered as a debit item or (–)
item. Net value of these items (foreign investment and borrowings) is recorded
as balance in capital account.
Equilibrium in BOP: Current account balance + Capital account balance = 0
There is no movement of official reserves of the Central Bank.
i.e. inflow of foreign exchange = outflow of foreign exchange.
Disequilibrium in BOP: When current account Balance + Capital account
Balance is not equal to zero. (It may be Positive and Negative).
(i) Surplus BOP: Here autonomous receipts are more than the autonomous
payments.
(ii) Deficit BOP: Here autonomous receipts are less than the autonomous
payments.
BOP is always balances, in case there is imbalance, it is corrected through
accommodating transactions.
SUBS
CRIBE

SUNIL PANDA COMMERCE CLASSES

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