SEMINAR PRESENTED

BY
NOUSHADALI
JYOTHI MOHAN
Balance of payment simply refers to the summary
of all transactions between citizens of two countries
for a given period. It summarises all the transactions
that have taken place between its residents and
foreigners in given period, usually a year.

It is a systematic record of all economic
transactions between the residents of one
country and the residents of the rest of the world
in a year. The word transaction refers to imports
and exports of goods and services, borrowing
and lending of funds, remittances, and govt. and
military expenditures.
According to IMF, BOP of a country is a
systematic record of all economic transactions
between its residents and the residents of the
rest of the world during a specified accounting
period.

In other words of RBI, BOP is a statistical
statement that systematically summarises, for a
specific time period, the economic transactions
of an economy with the rest of the world.
In simple words, a country has to deal with
other countries in respect of three items. They
are: (a) visible items (physical goods), (b)
invisible items (services) (c) capital transfer
(capital receipts and capital payments.

1. Payment for merchandise imports and receipts
for merchandise exports.
2. Loan to and investments in foreign countries
and enterprises, foreign investments in
domestic enterprises and borrowing from
foreign countries, agencies etc.
3. Tourist traffic, tourist expenditure abroad by
domestic tourists and foreign tourists in
reporting country.
4. Money paid to foreign carriers and receipts for
foreign goods carried within national borders.

5. Payments and receipts for services to and from
foreign countries. These services includes cable
and telegraphic payments, bank commission,
insurance premium, shipping and airline
services etc.
6. Expenses of foreign establishments outside the
country and expenses on foreign embassies
establishments in the home country.
7. Receipts and payments of interest and dividends
or for technical know-how.
8. Gifts, donations, awards etc. paid or received by
a country.

We know that every business firm prepares
its periodic balance sheet of its transactions
with the rest of the society for knowing its
assets and liabilities. Like that, every nation
carrying out economic transactions with the
rest of the world prepares its knowing how
much it has to pay to other countries and how
much it has to receive from other countries
and what is the position of the overall
balance.

Balance of payment (or international
transaction) is recorded on the basis of double
entry principle. According to this principle, every
transaction has two aspects i.e. debit and credit
entries of the same amounts. A debit is created
whenever an asset is increased, or liability is
decreased or an expense is increased. Similarly, a
credit is created whenever an asset is decreased,
or a liability is increased or an expense is
decreased. BOP transactions are accounted on the
basis of these principles. These BOP accounting
principles are logically consistent.
a) Transactions that earn foreign exchange are
recorded as credit entries. These are recorded
in the balance of payments with pus (+) sign
(foreign exchange is increased). Selling real
assets or financial assets or services to
foreigners is a credit entry. This is credit
because this transaction earns foreign
exchange. When an asset or service is sold to
a foreign citizen, payment is received form
that foreign country i.e. foreign exchange is
earned (decrease in asset is credited or asset
or service which has gone out is credited).

b. Transactions that expend or use up foreign
exchange are recorded as debits. These are
entered with a minus (-) (foreign exchange is
decreased).

Credit Debit
1. Export of Goods 700 5. Import of Goods 850
2. Export of services 100 6. Import of services 50
3. Receipts of gifts etc. from
foreigners
40 7. Gifts made to foreigners 60
4. Capital receipts (capital inflow,
e.g., borrowing from foreigners)
60 8. Capital payments (capital
outflow i.e. lending of
capital or repayment of
foreign liabilities
40
9. Net changes in External Reserve
(bal.fig.)
100
Total Receipts 1,000 Total Payments 1,000
The left side of the above tables shows the receipts that are all the ways in
which a country can get foreign exchange. The right side shows the payments how
the foreign currency is spent.
There are three components of BOP. They are: (a) current
account, (b) capital account, and (c) official reserve
account. These may be explained as below:
Components or items of current Account:
1. Visible trade or merchandise trade
2. Invisible trade or service trade
3. Factor income
4. Unilateral transfers
Components or Items of Capital Account
1. Direct Investment
2. Portfolio Investment
3. Other Investments
4. International Loans
Current account is like an income and
expenditure statement. The surplus or deficit
in it is transferred to capital account which is
like a balance sheet. It is important to note
that it is not always possible to match all
debits with credits. This happens due to
differences in sources sand timing of events.
Thus, mostly there is a statistical discrepancy.
A balancing entry is shown by way of errors
and omissions.
If the overall BOP (sum of current account,
capital account and errors and omissions) is
surplus, the surplus amount is used for repaying
the borrowings from the IMF. Then the balance is
transferred to the official reserve account.
Consequently official reserve account (or official
settlement account) is increased. On the contrary,
when the overall balance is found deficit, the
monetary authorities arrange for the capital flows
(from external sources like borrowing form IMF or
official borrowings) to make up the deficit.
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