International Economics
Presentation
Balance of Payment
and Balance of Trade
Prachi Chinchanikar (11)
Sneha Sharma (12)
Vaishnavi Gurav (13)
Anisha Nandanwar (14)
Sakshi Pardeshi (15)
Balance of Payment
Balance of payment is a summary record of economic and financial
transactions between a nation and rest of the world.
Balance of Trade
Balance of trade is the comparison of the value of
a country's exports of goods and services against
it's imports.
Characteristics of Balance of
Payment
• Financial Statement: The Balance of Payments (BOP) is a
financial statement summarizing a country's transactions with the
rest of the world.
• Double Entry system: The Balance of Payments (BOP) uses a
double-entry system, recording foreign exchange inflows as
credits and outflows as debits.
• Time Period: Most countries prepare a balance of payment for a
period of one year. Though many countries also prepare them on a
quarterly basis too.
Characteristics of Balance of
Payment
• Accommodating and Autonomous Flows: In a Balance of Payments,
autonomous international transactions may cause imbalances. The
monetary authority then uses its reserves to accommodate these
discrepancies, as debit and credit sides do not equalize automatically.
• Components : The Balance of Payments has two main accounts: the
Current Account for trade in goods and services, and the Capital
Account for long-term assets and liabilities.
Difference Between Balance of Payment and
Balance of Trade
Balance of Payment Balance of Trade
BOP is a wider and more comprehensive concept BOT tracks inflow/outflow from visible items
(merchandise trade).
Includes both visible (goods) and invisible (services, Records only visible exports/imports recorded at
transfers) international transactions. ports.
Comprises current account, capital account, and BOT is a subset of BOP, covering only merchandise
official reserves. trade.
Reflects a country's true international monetary BOT is partial, not comprehensive, in reflecting
position. external transactions.
Calculated annually due to complex and detailed BOT figures are regularly available due to port-based
entries. recording.
BOP always balances in accounting terms but can BOT can show disequilibrium (deficit/surplus) both
show economic imbalances. economically and in accounting terms.
Balance of Payment on Current Account
• The Current Account in the Balance of Payments records all transactions related to imports and exports of
goods and services, including unilateral transfers during a financial year. It is divided into two components:
• Trade Account (Merchandise Account):
• Records imports and exports of tangible goods (visible items).
• The difference between exports and imports is the Balance of Trade, which can be:
• Surplus if exports > imports.
• Deficit if exports < imports.
• Balanced if exports = imports.
• Invisibles:
• Records the export and import of intangible services like software, financial, education, health,
and scientific services, among others.
• Balance on Current Account: Reflects the net result of all transactions in goods, services, and
unilateral transfers.
Balance of Payment on Capital Account
• Capital Account records international financial transactions that change a country's assets and liabilities. It represents the
international investment position and helps balance current account surpluses or deficits. Key components include:
• Foreign Investments:
i. Direct Investments (FDI): Direct investment in factors of production (e.g., Toyota building a factory in India).
ii. Portfolio Investments: Indirect investments like stocks, bonds, and debentures (e.g., JP Morgan buying Reliance
shares).
• External Assistance:
• Loans and aid from governments or multilateral institutions (e.g., World Bank), with inflows recorded as positive.
• Commercial Borrowings:
• International loans at commercial interest rates (External Commercial Borrowing - ECB), affecting capital inflows
and outflows.
• Banking Capital:
• Records transfers of banking assets and liabilities, including NRI capital.
• Other Capital & Foreign Exchange Position:
• Central bank reserves financing current account deficits, including errors and omissions as a balancing item.
Importance of Balance of Payment
Balance of Payment is a crucial financial statement prepared by the Central Bank of any
country. The importance of this statement cannot be overstated for the following
reasons:
• It presents a clear picture of a country's economic and financial position.
• It shows whether a country has excess of foreign exchange or runs a shortage of
foreign exchange
• It helps to determine if the external value of a country's currency will appreciate or
depreciate.
• It allows the Government to take corrective action on trade, fiscal and monetary
policy.
• Since BOP are prepared by countries in a uniform manner, it facilitates international
comparison. The Balance of Payment is a very useful document presenting a clear
picture of the state of the economy, where it is headed and what needs to be done to
reach a more aspirational level of development.
• The Government can monitor the impact of tariffs on imports and take necessary
action to regulate trade and conserve the usage of scarce foreign exchange.
Thank you
