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Balance Of Payments

It is a systematic record of all international transactions of


that country during a given period. It is different from
balance of trade which is defined as the difference b/n
value of goods sold to foreigners from one country and
value of goods purchased by it from foreign countries.
It is composed of two sections:
Balance of Current Account
It includes balance of services, balance of unilateral
transfers and balance of trade.

Balances of services records all the services exported and


imported by a country in a year. They are invisible and intangible.
They include
Transportation, banking and insurance receipts and payments from
and to the foreign countries.
Tourism, travel services and tourist purchases of goods and services
received from foreign visitors and paid out to foreign countries.
Expenses of diplomatic and military personnel stationed overseas
and receipts from similar personnel from overseas stationed in the
home country.

Balance of unrequited (unilateral) transfers


It includes all gifts, donations, grants, receipts and
payments to other countries.
All these balances ,i.e., balance of trade, balance of
services and balance of unilateral transfers constitute
balance of current account.
Balance of payment on capital account: It includes
balances of private direct investments, pvt. portfolio
investments(banking capital) and govt. loans to foreign
countries. It basically deals with debts and claims.

Main items of capital account:


Pvt.foreign capital flow,movement in banking capital(portfolio
captical),official capital transaction(loans received by the pub.
Sector ,foreign currency reserves, gold, SDR of the IMF etc.gold
movement( buying and selling by the C.B., and other
miscellaneous items like all kinds of capital receipts and payments.
Balance of Payments always Balances:
In the accounting sense, bop always balances because payment
accounts are always prepared on the basis of double entry system,
where the receipts side is always equal to payments side.
In operational sense(economic balance),it is not necessary that
bop should always balance. When the current account is in deficit
or surplus, then the balance is restored with the help of capital
account.

Disequilibrium in BOP
A countrys BOP is in disequilibrium when there is either a
surplus(favourable i.e,when receipts exceeds, total
payments) or deficit(unfavourable i.e, when total
payments exceeds total receipts) in the BOP
Types
Cyclical diseq..: It is caused by business cycles.
Structural diseq: It is caused when heavy investment
programes are undertaken by developing countries by
resorting to heavy imports not matched by equivalent
amount of exports

Secular disequi..: The movement of an economy from one stage to another


causes secular disequEG.rapid growth in pop . may lead to increase in imports
and decrease in exports.

Causes for disequi.


Natural factors:-like flood, drought etc may lead to fall in
production-fall in exports(imports remaining the same may lead to
adverse BOP
Change in the price-cost structure of export industries:- high
price cost structure may reduce exports making BOP adverse.
Heavy exp. On Embassies by newly independent countries in
order to make better relations with other countries.
Development Schemes:-DCs may import a lot of machines, rawmaterials etc in the initial stages not matches by sufficient exports .

Change in the rate of foreign exchange:- If the external


value of our currency depreciates imports become dearer but
exporters gain.
Fall in DD for the countrys goods in the foreign market.
Trade cycles:- A regular feature of capitalistic country. Exports
may fall during depression, leading to adverse balance.
Import of services in the initial stages of development.
Demonstration Effect:- Imports are more and exports less.
Pop. Explosion:- increased consumption DD and fall in export.
Foreign capital investment outflow with the aim of
getting profit.
International Economic Practices and Policies:- Like
imposing sanctions on certain countries,imposing high duties on
Indian textile goods by the EU.
Political Factors like expansion of embassies,political
instability,international relations,partion or unification
of a country.

MEASURES FOR CORRECTING DISEQUILIBRIUM


Economic measures-broadly divided into.
Monetary measures
Deflation:- volume of currency to be reduced-bank rate
has to be raised to reduce the volume of credit and the
demand for imports. A fall in prices and costs in the home
country will encourage exports and discourage imports.
Depreciation:- It means fall in the rate of exchange of
one country in terms of another-imports become costlier
as one has to pay more-exports become cheaper-BOP
becomes favourable.

Devaluation:- It means lowering the value of one currency


in terms of another The difference b/n depri..& deval..is that
deval..is brought about by the govt. and depre.. is effected
by the market forces .Here, imports become costlier and
exports cheaper.

Exchange Control:--All the exporters are directed by the


CB to surrender their foreign exchange earnings to it , and
the foreign exchange is rationed out among the licensed
exporters.
External Debts:- the govt can also borrow from
international agencies to correct its balance of payments.

NON-ECONOMIC MONETARY MEASURES


Discouraging imports and encouraging exports.EG.,
impose heavy duties on imports and reduce export duties.
Quota restrictionsDetermining a quota to reduce import
licences are issued to regulate importsit is a more
effective method than imposing heavy import duties
because they have immediate effect on reducing imports.
Adjustment through capital Movement:- A deficit can be
met by capital movement- If capital is perfectly mobile
among the nations, a small rise in domestic interest rate
will bring a large inflow of capital and it will continue till
the domestic rate is equal to the world rate.

Tariffs:-they are directed by the govt.By imposing higher


tariffs brings in more revenue to the govt.But quotas
bring in no revenues.Distribution of quotas may involve
corruption and discrimination.
Attraact Foreign Tourists:- They bring with them a large
amount of foreign currency.
Liberal Industrial Policy.- It wil encourage exports and
substitute imports.

Political Measures
Restriction on Expenditures on Embassies, political
and administrative bodies etc can improve BOP problems.
No Political Alliances:- Countries should become
independent sovereign states which can make necessary
measures to correct adverse BOP.
Economy in Political and Administrative matters:-Non
essential foreign trips should be banned.
Changes in Basic Political Ideologies:- EG. LPG.
Participation and Contribution from NRIs.
Social Measures:- Making people aware of the
situation.EG.economic use of petroleum products.

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