SEMINAR ON

INTERNATIONAL FINANCE

BALANCE OF PAYMENTS

GROUP : 1

Group Members :

1. Ajeesh M.K

2. Nisham M

3. Sajeesh

4. Swathy Vasudevan

BALANCE OF PAYMENT

• BOP is a statement listing receipts and payments in international

transactions of a country.

• Based on Double entry book-keeping concept.

• Credit Balance Receipt of Foreign Exchange from abroad.

• Debit Balance Payment in Foreign Exchange to foreign

residents.

• Equal debit and credit balances if entries

are done properly.

B O P …. The Balance of Payments of a country is a systematic record of all

economic transactions between the residents of a country and the rest of

the world.

Presents a classified record of all receipts on account of goods exported,

services rendered and capital received by residents and payments made

by them on account of goods imported and services received from the

capital transferred to non-residents or foreigners.

Economic Transactions – import and export (capital inflow &

outflow as FII & FDI)

• Residents - Individuals & fin. Institutions permanently residing in the country’s

border.

IMPORTANCE OF B.O.P

Records all the transactions that create demand for and supply

of a currency.

Indicates demand-supply equation of the currency.

Confirm trend in economy’s international trade and exchange

rate of the currency.

Indicate change or reversal in the trend.

Indicate policy shift of the monetary authority (RBI) of the

country.

TYPES OF ECONOMIC TRANSACTIONS

Cash Transactions

Payments & Receipts

Financial Securities

Barter system

Gifts & Donations (Payment/ Receipt)

B.O.P ACCOUNTING

BOP follows the accounting system of double entry.

Balance of payments accounting system (BOP) is an accounting

system design to track buy and sell transactions between countries

by an individuals, businesses and government agencies.

A double entry system in which each transaction creates a credit

entry and a debit entry of equal value.

Buying goods and services creates debit entries and selling things

produces credits entries.

The two BOP entries are used to denote the giving and receiving

sides of external transactions.

ASPECTS OF B.O.P ACCOUNTING

Each economic transactions have a debit and credit aspect.

CREDIT TRANSACTIONS DEBIT TRANSACTIONS

Exports of goods & services Import of goods & services

Income receivable from abroad Income payable abroad

Transfers from abroad Transfers to abroad

Increase in external liabilities Decrease in external liabilities

Decrease in external assets Increase in external assets

B.O.P ACCOUNTING

The net sum of credit and debit entries is zero.

Data are collected from many sources - discrepancies

between the entries occur for various reasons.

Omissions and inaccurate measurements may occur.

Equality between the sum of credit and debit entries is

brought about by the inclusion of a balancing item which

reflects net errors and omissions.

B.O.P COMPONENTS

Current Account

Capital Account

Official reserve account

CURRENT ACCOUNT

Represents the real income.

Includes :

1. Import of Goods

2. Balance of Merchandise Trade

3. Invisibles

Balance of Trade : Export – Import

Export > Import → Surplus BOT

Export < Import → Deficit BOT

Invisibles : Receipts & payments on :

1. Trade & services like tourism, transport etc

2. Interest, Dividend

3. Unilateral Transfers : Pension, Remittances, gifts

CURRENT ACCOUNT…

Movement of Gold : Monetary or Non- monetary

{ Monetary : sale or purchase that influence international

monetary reserves. }

CAPITAL ACCOUNT

Consists changes in financial position of country.

Comprise short term and long term inflow and outflow of funds.

Credit side records official & private borrowings from abroad net

of repayments, direct and portfolio investment and short term

investments into the county, bank balances of non residents held in

the country etc.

Debit side records dis-investment of capital invested into the

country, the country’s investment abroad, loans given to a foreign

government and bank balances held abroad.

OFFICIAL RESERVE ACCOUNT

The surplus of capital and current account are transffered to ORA.

ORA can be used where there occurs future deficit.

Only reserve assets are included.

Reserve assets are those assets which the monetary authority of a

country used to settle the trade , the surplus or deficit that arise on

the capital and current account.

Includes:

- The cash balance in Central Bank

- Gold

- Reserve in IMF

B.O.P EQUILIBRIUM

Balance of payments equilibrium occurs when induced balance

of payments transactions - those engineered by the government

to influence the nominal exchange rate - are zero.

Implies that autonomous receipts from exports and the sale of

securities abroad equal autonomous payments for imports and

the purchase of securities from foreign residents.

Since changes in the stock of official reserves of foreign

exchange are the method used by the authorities to fix or

manipulate the exchange rate, BOP equilibrium requires that the

stock of foreign exchange reserves be constant.

B.O.P EQUILIBRIUM…

If debit on current account is greater than the credit, funds flow into

the country that are recorded on the credit side of the capital

account and the excess of debit is wiped out.

Ex-post Concept - Describes what has actually happened

over a specific past period

CURRENT ACCOUNT + CAPITAL ACCOUNT = 0

B.O.P DISEQUILIBRIUM

Occurs when :

Demand ≠ Supply

Debit > Credit → Deficit

B.O.P DISEQULIBRIUM - CAUSES

1. Development Schemes :

- Huge investment in development schemes in developing

countries Export ↓ Import ↑ → Structural changes in BOP

2. Price – Cost Structure :

- Change in PCS of export industries affect export volume

- Increase in price due to higher wages, high cost of raw material

3. Change in Foreign Exchange rate :

- ↑ External value of money Import ↑ Export ↓

- ↓ External value of money Import ↓ Export ↑

B.O.P DISEQULIBRIUM – CAUSES…

4. Fall in Export Demand :

- increase in domestic production in rich countries.

- loss of colonial markets.

- more persistent in underdeveloped countries.

5. Demonstration Effect :

- People in under developed countries tend to follow consumption pattern

of developed countries imports increase and creates dis-

equilibrium

6. International Borrowing & Lending :

- Borrowing country have unfavorable bop – lending country have

unfavorable bop

B.O.P DISEQULIBRIUM – CAUSES…

7. Cyclical Fluctuations :

During depression income of people in foreign countries

fall → exports decrease → bop disequilibrium

8. Natural Factors :

- Drought, floods etc adversely affect the country production.

- Exports falls, imports increase leading to bop deficit.

9. Population Explosion :

- Rapid growth of population → imports increase → decrease export

capacity

QUESTIONS ???