Balance of payment is a systematic record of all economic transactions between a country and the rest of the world over a period of time, presented in a double-entry bookkeeping format. It includes credits for exports, services provided to foreign countries, and financial inflows; and debits for imports, services received from other countries, and financial outflows. A country has a balance of payments surplus if its credits exceed debits and a deficit if debits exceed credits. Countries use both monetary policies like adjusting exchange rates and non-monetary policies like promoting exports or restricting imports to address balance of payments deficits.
2. IntroductionIntroduction
• Statically records of country’s international transaction over a
certain period of the time presented in the form of double entry
book keeping.
• All trade conducted by both the private and public sectors are
accounted for BOP in order to determine how much money is going
in and out.
• Example of international transaction includes imports and exports of
goods (balance of trade) and services and cross broader investment
in business, bank account, bond and real assets.
• If country received money then its terms as credit(+) transaction
whereas if country pay money than it is term as debit(-) transaction.
3. Cont….Cont….
In BOP account, any transaction that results in a receipts from
foreign will be recorded as credit with positive sign whereas any
transaction that results, give rise to a payment to foreigner will
be record as a debit, with a negative sign.
Credit entries in the BOP means results from foreign sales of
goods and services, goodwill, financial claim and real assets.
Debit entries on the other hand arise for purchase of a foreign
goods and services, goodwill, financial claims, and real assets.
Credit entries gives rise to demand for domestic currency, where
as debit entries gives rise to supply of domestic currency.
4. A Balance of Payment Account is a systematic record of all economic
transactions between residents of a country and the rest of the world
carried out in a specific period of time. These transactions include
payments for the country's exports and imports of goods &
services, financial capital, and financial transfers.
Meaning of Balance of Payment Account:
5. It is a systematic record of all economic transactions between one
country and the rest of the world.
It includes all transactions, visible as well as invisible.
It relates to a period of time. Generally, it is an annual statement.
It adopts a double-entry book-keeping system. It has two sides:
credit side and debit side. Receipts are recorded on the credit side
and payments on the debit side.
Features of Balance of Payment Account:
6. 1. Current Account Balance
2. Capital Account Balance and other minor components like errors and Omissions and
changes in Foreign Exchange Reserves
Current Account
Transactions
Merchandise
Transportation
, Insurance,
Miscellaneous
Incomes Transfers
Components of Balance of Payment Account:
7. Current Account Balance
• BOP on current account is a statement of actual receipts and payments in short
period.
• It includes the value of export and imports of both visible and invisible goods. There
can be either surplus or deficit in current account.
• The current account includes:- export & import of services, interests, profits,
dividends and unilateral receipts/payments from/to abroad.
8. Under Capital Account, capital inflows can be classified by instrument (debt or equity) and maturity (short or long-
term). The capital account balance measure the difference between Nepal sales of assets to foreigner and
Nepal purchase of foreign assets. It is difference between the receipts and payments on account of capital
account. It refers to all financial transactions.
The capital account involves inflows and outflows relating to investments, short term borrowings/lending,
and medium term to long term borrowing/lending.
There can be surplus or deficit in capital account.
It includes: - private foreign loan flow, movement in banking capital, official capital transactions,
reserves, gold movement etc.
Capital Account
Foreign
Investments Loans
Banking
Capital
FDI, FIIs,
ADRs/GDRs
Commercial
borrowing, trade
credit
NRI Deposits
Capital Account:
9. Disequilibrium
Debit exceeds Credit or Credit exceeds Debit causing an
imbalance in the BOP a/c
Deficit: Our Receipts from foreigners fall below our
payment to foreigners. (Unfavourable)
Surplus: Receipts exceeds its Payment (Favourable)
10. Causes
Economic Factors
Imbalance between export & Import
New Source of supply & new substitutes
High Domestic Price
Political Factors
Instability & Disturbance cause large capital outflow.
Social Factors
Population Growth
Change in fashion
11. Monetary measures
Non – monetary measures
I. Monetary measures.
Deflation
Devaluation of currency
Exchange control
Increase in Direct and Indirect Tax
II. Non Monetary measures
1.Export promotion
2. Import substitution
3.Quota
STEPS TO CORRECT BOP DEFICIT
12. 1. Monetary measures –
• Deflation - Deflation means falling prices. Deflation has been used as a
measure to correct deficit disequilibrium. A country faces deficit when its
imports exceeds exports.Deflation is brought through monetary measures
like bank rate policy, open market operations, etc. or through fiscal
measures like higher taxation, reduction in public expenditure, etc.
• Exchange Depreciation – Exchange depreciation means decline in the
rate of exchange of domestic currency in terms of foreign currency. This
device implies that a country has adopted a flexible exchange rate policy.
• Devaluation - Devaluation refers to deliberate attempt made by
monetary authorities to bring down the value of home currency against
foreign currency. Generally devaluation is resorted to where there is serious
adverse balance of payment problem.
13. Non-Monetary Measures –
• Export Promotion –
• The government can adopt export promotion measures to correct disequilibrium in the
balance of payments. This includes substitutes, tax concessions to exporters, marketing
facilities, credit and incentives to exporters, etc.The government may also help to promote
export through exhibition, trade fairs; conducting marketing research & by providing the
required administrative and diplomatic help to tap the potential mark
• Quotas –
Under the quota system, the government may fix and permit the maximum quantity or
value of a commodity to be imported during a given period. By restricting imports through
the quota system, the deficit is reduced and the balance of payments position is improved.
• Tariffs –
Tariffs are duties (taxes) imposed on imports. When tariffs are imposed, the prices of
imports would increase to the extent of tariff. The increased prices will reduced the
demand for imported goods and at the same time induce domestic producers to produce
more of import substitutes. Non-essential imports can be drastically reduced by imposing
a very high rate of tariff.
14. The difference between a country's imports and its exports. Balance of
trade is the largest component of a country's balance of payments.
The items which include imports, foreign aid, domestic spending abroad
and domestic investments abroad comes under imports
The items which include exports, foreign spending in the domestic
economy and foreign investments in the domestic economy comes under
exports
When exports are greater than imports than the BOT is favorable and if
imports are greater than exports then it is unfavorable.
Favourable balance of trade indicates the good economic condition of
the country.
Balance of Trade
15. Cost of Production
Cost and Availability of Raw materials
Exchange Rate movements
Non-Tariff barriers such as environmental, health or
safety standards.
Factors Influencing Balance of Trade:
17. BASIS OF
COMPARISON
BALANCE OF TRADE BALANCE OF PAYMENT
Meaning Balance of Trade is a statement that captures
the country's export and import of goods
with the remaining world.
Balance of Payment is a statement
that keeps track of all economic
transactions done by the country
with the remaining world.
Records Transactions related to goods only. Transactions related to both goods
and services are recorded.
Capital Transfers Are not included in the Balance of Trade. Are included in Balance of
Payment.
Which is better? It gives a partial view of the country's
economic status.
It gives a clear view of the
economic position of the country.
Result It can be Favorable, Unfavorable or
balanced.
Both the receipts and payment
sides tallies.
Component It is a component of Current Account of
Balance of Payment.
Current Account and Capital
Account.
