2. BALANCE OF TRADE
The difference between a country's imports
and its exports. Balance of trade is the largest
component of a country's balance of payments.
Debit items include imports, foreign aid, domestic
spending abroad and domestic investments
abroad. Credit items include exports, foreign
spending in the domestic economy and foreign
investments in the domestic economy. A country
has a trade deficit if it imports more than it
exports; the opposite scenario is a trade surplus.
Also referred to as "trade balance" or
"international trade balance."
5. BALANCE OF PAYMENTS
“A record of
international
transactions between
residents of one
country and the rest
of the world”
6. OBJECTIVE
Its main objective is to represent the
economic position of a country, whether
its currency is rising or falling in its
external value.
7. 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.
8. 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.
10. COMPONENTS OF BALANCE OF
PAYMENTS
CURRENT ACCOUNT
• The current • The capital
CAPITAL ACCOUNT
account of a account of a
country consists country consist of
of all transactions its transaction in
related to trade in financial assets in
goods and the form of short-
services and term and long-
unilateral term lending and
transfers. borrowing.
11. Table. Balance of payments account
Credits(+) (Receipts) CURRENT ACCOUNT Debits(-)Payments
EXPORTS IMPORTS
• Goods •Goods
• Services •Services
• Transfer payments •Transfer payments
CAPITAL ACCOUNT
Borrowings from Foreign countries Lending to foreign countries
investments by foreign countries Direct investments by foreign countries
OFFICIAL SETTLEMENTS ACCOUNT
Increase in Official Reserve of Gold and
Increase in Foreign Official Holdings
Foreign Currencies
ERRORS AND OMISSIONS
12. Major items of India’s balance of
payments (us$ million)
1007-08(PR) 1008-09(P) April-Dec(1008- April-Dec(1009-
09)(PR) 1010)(P)
Export 166163 175184 150510 114473
Import 157789 194587 148967 113988
Trade Balance -91616 -119403 -98446 -89515
Invisible net 74591 89587 70931 59185
Current Account -17034 -19817 -17516 -30330
Balance
Capital Account* 109198 9737 7136 41630
Change in -91164 10080 10380 -11330
Reserve
*Source: Reserve Bank of India Report
13. For example…
Trade balance
•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.
14. BOP SURPLUS AND DEFICIT
What is BOP Surplus ?
What is BOP Deficit ?
15. MEANING OF DISEQUILIBRIUM IN
BALANCE OF PAYMENTS
A country’s balance of payments is in
disequilibrium when there is no perfect
equality between the demand and supply for
foreign exchange.
16. 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 country’s 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 country’s
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.
