BALANCE OF PAYMENTS
INTERNATIONAL BUSINESS ASSIGNMENT
CONTENTS
Introduction
Features
Components of the Balance of Payments
Current Account
Capital Account
Official Settlement Account
Disequilibrium of the Balance of Payments
Reasons for the Disequilibrium of BOP
Measures to Correct the Disequilibrium of BOP
2
INTRODUCTION
In the words of Kindle Berger, “Balance of payments of a country is a
systematic record of all economic transactions between the residents
of the reporting country and the residents of the rest of the world
during a period of time.”
The objective is to ascertain the monetary picture of international trade
and investments of a country.
3
FEATURES :
It is a financial statement of a country.
It is based on double-entry book keeping system – all receipts are recorded in the
credit side and all payments are recorded in the debit side.
It includes all transactions, visible as well as invisible.
It relates to a period of time. Generally, it is an annual statement.
It is calculated in terms of single currency.
4
COMPONENTS OF BOP ACCOUNT
Receipts - Credit (+) Payments - Debit (-)
1. Current Account
• Exports of goods and services • Imports of goods and services
• Employee compensation and investment income • Payment to employees and investment dividend
• Transfer receipts in form of gifts & grants • Transfer payments in form of gifts & grants
2. Capital Account
• Borrowing from abroad • Lending to foreigners
• Direct investment by foreigners in the country • Direct investment by residents in foreign countries
3. Official Settlement Account
(In case of deficit) (In case of surplus)
Increase in foreign official holdings on the account of Increase in reserves of foreign currency and official
official sale of reserve assists and foreign currency reserves of gold 5
BALANCE OF PAYMENTS ON THE CURRENT ACCOUNT
It is the net of actual incomes and Current Account
expenditure of foreign exchange during
the year.
The current account includes:- export &
Goods & Unilateral
import of goods and services, interests, Services Transfers
profits, dividends and unilateral
receipts/payments from/to abroad.
Income
6
BALANCE OF PAYMENTS ON THE CAPITAL ACCOUNT
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
Long – Term Short-Term borrowing.
Capital Capital
Movement Movement It includes:- private foreign loans,
foreign direct investment,
movement in banking capital and
Loans investment in short-term securities. 7
OFFICIAL SETTLEMENT ACCOUNT
The official reserve assets of a country include gold, foreign exchange reserves
and special drawing receipts in case of the members of the International
Monetary Fund.
Usually, the deficit in current account is met with the inflow in the capital account.
In case of deficit, the country has to draw up on its reserves of foreign exchange.
In case of surplus, the reserves of foreign currency and official reserves of a
country will increase.
8
DISEQUILIBRIUM OF BALANCE OF PAYMENTS
Disequilibrium the balance of payment takes place when the demand for foreign
exchange exceeds its supply or vice versa.
A Surplus in the BOP occurs when Total Receipts exceeds Total Payments
Credit > Debit Surplus
A Deficit in the BOP occurs when Total Payments exceeds Total Receipts.
Credit < Debit Deficit
9
REASONS FOR THE DISEQUILIBRIUM OF BOP
Cyclical fluctuations
Inflation
Short fall in the exports
International Capital Movements
Political instability
Natural Calamites
10
MEASURES TO CORRECT THE DISEQUILIBRIUM OF BOP
Monetary Measures
Exchange Rate Depreciation: By reducing the value of the domestic currency, government can
correct the disequilibrium in the BoP in the economy. Exchange rate depreciation reduces the
value of home currency in relation to foreign currency. As a result, import becomes costlier and
export become cheaper. It also leads to inflationary trends in the country
Devaluation: Devaluation is lowering the exchange value of the official currency. When a country
devalues its currency, exports becomes cheaper and imports become expensive which causes a
reduction in the BOP deficit.
Deflation: Deflation is the reduction in the quantity of money to reduce prices and incomes. In the
domestic market, when the currency is deflated, there is a decrease in the income of the people.
This puts curb on consumption and government can increase exports and earn more foreign 11
exchange.
MEASURES TO CORRECT THE DISEQUILIBRIUM OF BOP
Non-Monetary Measures
Export Promotion: To control export promotions the country may adopt measures to stimulate
exports like:
export duties may be reduced to boost exports
cash assistance, subsidies can be given to exporters to increase exports
goods meant for exports can be exempted from all types of taxes.
Import Substitutes: Steps may be taken to encourage the production of import substitutes. This
will save foreign exchange in the short run by replacing the use of imports by these import
substitutes.
Import Control: Import may be kept in check through the adoption of a wide variety of measures
12
like quotas and tariffs.
