3 BOP 2003

8/3/2019 3 BOP 2003

http://slidepdf.com/reader/full/3-bop-2003 1/21

UNIT 2Balance of Payments

Accounts

Nehal Kapadia1

8/3/2019 3 BOP 2003


Learning Objectives

• Meaning & definition of BOP

• Introduce the Balance of Payments (BOP)

• Describe the sub-accounts of the BOP• Consider the meaning of BOP “imbalances”

• Look at some sample BOP entries

• Disequilibrium in BOP

• Types of disequilibrium

• Causes & measures to correct disequilibrium

2

8/3/2019 3 BOP 2003


Balance of Payments

Accounts• A country’s balance of payments accounts keep track of

both its payments to and its receipts from foreigners.

– Every international transaction automatically enters in

the balance of payments twice: once as a credit (+)and once as a debit (-). Double-entry bookkeepingsystem.

• Every transaction has two entries:

– Payment = Debit (-) – Receipt = Credit (+)

3

8/3/2019 3 BOP 2003


Definition

“Balance of Payment is a systematic record

of all economic transactions between the

residents of the reporting country andresidents of foreign countries during a

given period of time”.

- Kindleberger

4

8/3/2019 3 BOP 2003


5

The Accounts of BOP

• The International Monetary Fund (IMF) is themultinational organization that collects the BOP statisticsfor over 160 different countries around the globe.

Following activities are considered in invisible trade:i) Travel

ii) Insurance premiums & payments of claims

iii) Investment income

iv) Donations, grants, migrant remittances & legaciesv) Miscellaneous services : advertising, film rentals,

pensions, patent fees, royalties, subscriptions toperiodicals & membership fees.

8/3/2019 3 BOP 2003


Contents of BOP A/c

• The BOP is comprised of two primary sub-accounts:

– Current Account (Real & short term transactions)

– Capital / Financial Account (Financial & long term

transactions)

• Two additional and important sub-accounts of theBOP include:

– Official Reserves Account

– Net Errors and Omissions Account

6

8/3/2019 3 BOP 2003


Format of BOP Account

Credits (Receipts in crores)

• Current A/C

1. Goods exported 100

2. Service exported 150

3. Inc. from investment

in foreign country 150

1. Unilateral receipts 200

600

• Capital A/C

1. Foreign investment 1002. Short term invest. 200

3. Long term borrowings 300

600

• Grand Total 1200

Debits (Payments in crores)

• Current A/C

1. Goods imported 200

2. Service imported 100

3. Payment for investments

done by foreigners 300

1. Unilateral payments 200

800

• Capital A/C

1. Investment abroad 1002. Short term lending 100

3. Long term lending 200

400

• Grand Total 1200 7

8/3/2019 3 BOP 2003


Balance of Payments

Accounts• The Current Account: Exports or imports of

goods or services in the current account

1. Merchandise trade (Exports or imports of goods

i.e. car, food, textiles etc)

2. Invisible trade (Services) Payments for legal

assistance, tourists’ expenditures, and shipping

fees3. Income

4. International interest and dividend payments and the

earnings of domestically owned firms operating 8

8/3/2019 3 BOP 2003


BOP Accounts

• The Capital Account (Transfers of wealth between

countries in the capital account)

• The Financial Account (Purchases or sales of financial

assets in the financial account)

• Financial inflow (capital inflow)

– A loan from the foreigners with a promise that they willbe repaid

• Financial outflow (capital outflow)

– A transaction involving the purchase of an asset from

foreigners – It measures the difference between sales of assets to

foreigners and purchases of assets located abroad.

– Direct investment

– Portfolio investment

– Other asset investments9

8/3/2019 3 BOP 2003


10

Official Reserves Account

• This is the total currency and metallic reserves

held by official monetary authorities within the

country

• Its significance depends on whether the country isoperating under:

– A fixed exchange rate regime

– A floating exchange rate system

8/3/2019 3 BOP 2003


Slide 12-11

• Official Reserve Transactions

– Central bank

• The institution responsible for managing the supply of

money – Official international reserves

• Foreign assets held by central banks as a cushion

against national economic misfortune

– Official foreign exchange intervention

• Central banks often buy or sell international reserves in

private asset markets to affect macroeconomic

conditions in their economies.

Balance of Payments Accounts

8/3/2019 3 BOP 2003


Balance of PaymentsAccounts

• The Fundamental Balance of PaymentsIdentity – Any international transaction automatically

gives rise to two offsetting entries in thebalance of payments resulting in a fundamentalidentity:

Current account (CA) + financial account(FA)+ capital account (KA) = 0

12

8/3/2019 3 BOP 2003


Balance of PaymentsAccounts

– Data associated with a given transaction maycome from different sources that differ incoverage, accuracy, and timing.

• This makes the balance of payments accounts seldombalance in practice.

• Account keepers force the two sides to balance by

adding to the accounts a statistical discrepancy.• It is very difficult to allocate this discrepancy among

the current, capital, and financial accounts.

13

8/3/2019 3 BOP 2003


India’s Balance of Payments

DataCredits Debits

Current Account

1 Exports $1,418.64

2 Imports ($1,809.18)

3 Unilateral Transfers $10.24 ($64.39)

Balance on Current Account ($444.69)

Capital Account

4 Direct Investment $287.68 ($152.44)

5 Portfolio Investment $474.39 ($124.94)

6 Other Investments $262.64 ($303.27)

Balance on Capital Account $444.26

7 Statistical Discrepancies

Overall Balance $0.30

Official Reserve Account ($0.30)

0.73

8/3/2019 3 BOP 2003


Statistical Discrepancy

-Sampling Error

• financial, services trades data inaccuracies

-Unrecorded interest/dividends

• unreported borrowing from abroad and other illegalactivities

-Timing Discrepancies

-Black Markets

– CA + FA + KA + Stat. Dis. = 0

That is why, it is important to know fundamentals of BOP accounting.

15

8/3/2019 3 BOP 2003


16

Fundamentals of BOP Accounting

• The balance of payments must balance

– Sub accounts may be imbalanced

• Three main elements to the process of

measuring international economic activityinclude:

– Identifying what is and is not an international economictransaction

– Understanding how the flow of goods, services, assets,and money creates debits and credits to the overall BOP

– Understanding the bookkeeping procedures for BOPaccounting

8/3/2019 3 BOP 2003


17

BOT, BOP and Economic Crises

• BOT relates to trade of visible goods

• BOP relates to the trade of visible as well as invisible goods.

• BOT is narrow concept. BOP is a wider.

• BOT is a part of BOP.

• BOT may be surplus or deficit. It may be imbalanced whereas BOP

must always balance.

• Economic crises

• The sum of cross-border international economic activity can be used

by international managers to forecast economic conditions and insome cases, the likelihood of economic crises

• The mechanics of international economic crises often follow a similar

path of development

8/3/2019 3 BOP 2003


BOP Equilibrium

• In accounting sense, BOP must balance.

• Receipts = Payments (BOP = 0)

• In functional sense , there may bedisequilibrium

• Receipts > Payments (BOP positive)

• Receipts < Payments (BOP negative)

18

8/3/2019 3 BOP 2003


Types of Disequilibrium

1) Cyclical disequilibrium (Trade cycle : changes in

income, employment, output & prices)

2) Structural disequilibrium (Changes in demand &

supply)

3) Short term disequilibrium (Temporary due to

borrowings or lending)

4) Long term/ Secular/ Fundamental disequilibrium

(Changes in dynamic forces like population, capitalformation, technological advancement, innovations)

5) Exchange rate disequilibrium (Changes in valuation of

currency)19

8/3/2019 3 BOP 2003


Causes of Disequilibrium

• Desire for rapid economic development

• Trade cycle

• Changing export demand

• Population growth

• Huge external borrowings

• Inflation

• Demonstration effect

• Reciprocal demand

• Neglects of export sector

• Natural calamities20

8/3/2019 3 BOP 2003


Measures to correctdisequilibrium

Monetary (Indirect)

measures

1. Deflation2. Exchange depreciation

3. Devaluation

4. Exchange control

Non-monetary

(Direct)measures

1. Tariffs2. Quotas

3. Export promotion

4. Import substitution

21

3 BOP 2003

Documents

Transcript of 3 BOP 2003