Transcript BALANCE OF PAYMENTS……”

“BALANCE OF PAYMENTS……”
“TABLE OF CONTENTS”
Definition
 Purpose of BOP
 Structure of BOP Accounts
 Is BOP always in equilibrium?
 Disequilibrium in BOP
 Assessing the BOP Disequilibrium
 Causes of Disequilibrium
 Measures to correct adverse BOP

“DEFINITION”
A systematic record of all economic
transactions between the residents
of a country and residents of foreign
countries during a certain period of
time.
“PURPOSE OF BOP”
Provides extremely useful data for the
economic analysis
 Reveals the changes in foreign trade
 Provides indications of future repercussions of
country’s past trade performance
 Invites government attention for corrective
measures

“STRUCTURE OF BALANCE OF
PAYMENTS ACCOUNTS”
The BOP of a country is constructed on the
principle of double-entry book-keeping.
In BOP accounts, debit and credit items are
shown vertically and horizontally they are
divided into three categories:
• Current Account
• Capital Account
• Official Settlements Account
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CURRENT ACCOUNT : It consists of all transactions
relating to trade in goods and services and
unilateral transfers.
CAPITAL ACCOUNT : It consists of its transactions
in financial assets in the form of short-term and
long-term lendings and borrowings, and private
and official investments.
OFFICIAL SETTLEMENTS ACCOUNT : It is in fact a
part of capital account. It measures the change in
nation’s liquidity and official reserve assets during
the year.
Balance of Payments Account
“IS BOP ALWAYS IN EQUILIBRIUM?”
BOP is written as :
B= Rf-Pf
Where, B = Balance of Payments
Rf = Receipts from foreigners
Pf = Payments made to foreigners
When B=Rf-Pf=0, the BOP is in equilibrium
Rf-Pf>0, there is surplus in the BOP
Rf-Pf<0, there is deficit in the BOP
Any positive balance in a country’s current account is
exactly offset by negative balance on its capital account and
vice versa. Thus, in the accounting sense, the BOP always
balances.
“DISEQUILIBRIUM IN BOP”
When the total receipts do not match
with total payment obligations of the
accounting period, this is a position of
disequilibrium in the balance of
payments.
“ASSESSING THE BOP DISEQUILIBRIUM”
For the purpose of assessing the overall
BOP position of the country, all the
transactions are regrouped under the
following two categories:•
•
Autonomous Transactions
Accommodating Transactions
Autonomous Transactions
All exports and imports of
goods and services, longterm and short-term
capital movements
motivated by the desire to
earn higher returns abroad
or to give gifts and
donations, etc. are the
autonomous transactions.
Accommodating Transactions
The short-term capital
movements, viz., gold
movements and
accommodating capital
movements on account of
autonomous transactions
are called accommodating
transactions.
“CAUSES OF
DISEQUILIBRIUM”
 Temporary Changes (or Disequilibrium)
 Fundamental Disequilibrium
 Structural Changes (or Disequilibrium)
 Changes in
Exchange Rates
 Cyclical Fluctuations (or Disequilibrium)
Contd……
Changes in National Income
 Price Changes
 Stage of Economic Development
 Capital Movements
 Political Conditions

“IMPLICATIONS OF
DISEQUILIBRIUM”
A
deficit in the combined current and capital
accounts is regarded as undesirable for the
country.
A
current account deficit in BOP of a country
may have either good or bad effects
depending on the nature of an economy.
“MEASURES TO CORRECT
ADVERSE BOP”
 Adjustment through Exchange
Depreciation (Price Effect)
 Devaluation or Expenditure-Switching
Policy
 Direct Controls
 Adjustment through Capital Movements
Contd…….
Adjustment through Income
Changes
 Stimulation Of Exports and
Import Substitutes
