Balance of Payments Contents Introduction Components of balance of Payments.
Balance of Payments 2011
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Transcript of Balance of Payments 2011
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It is a systematic record of a countrys
economic transactions with the outside world
in a given year In balance of payment accounting credits are
shown on the left side & debits on the right
side of balance sheet Payment received from a foreign country is a
credit transaction
Payment to a foreign country is a debit
transaction
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Credit side:
Exports of goods & services, transfer receipts in form of gifts.Grants etc from foreigners, borrowing from abroad,
investments by foreigners in the country, official sale ofreserve assets including gold to foreign countries &international agencies
Debit side:
Imports of goods & services, transfer payments to foreignersas gifts, grants etc, lending to foreign countries, investmentsby residents to foreign countries & official purchase ofreserve assets or gold from foreign countries & international
agencies
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Credit & debit items shown vertically in
balance of payments accounts
Horizontally they are divided into threecategories:
The current account
The capital account The official settlement account or official
reserve assets account
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Visible items Invisible items
Visible items: All transactions related to trade in goods-exports & imports of goods
Invisible items: all other items- payment & receipt for
services, such as banking, insurance, travel & transportation,& shipping etc
Transfer payments is at times another category- relate togifts, foreign aid, pensions, private remittances, donationsreceived from foreign individuals & governments to
foreigners
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Merchandise exports & imports are most important Exports shown as positive item & calculated free on
board(fob) meaning costs of transportation,
insurance etc are ex
cluded Imports are shown as negative item & are calculated
c.i.f meaning costs, insurance & freight are included The net balance on visible items i.e. excess of
merchandise exports over merchandise importscalled balance of trade which can be favorable orunfavorable
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Balance of exports & imports of services & transfer paymentsis called balance of invisible trade
Invisible plus visible determine the actual current account
position Exports of goods & services exceeds imports of goods &
services the balance of payments is favorable & oppositecase it is unfavorable
Current account: exports of goods & services & receipts of
transfer payments entered as credits as they representreceipts from foreigners
Imports of goods & services & grant of transfer payments toforeigners as debits as the represent payments to foreigners
Net value of these visible & invisible trade balances is
balance oncurrent account
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It shows international flow of loans & investments Short term capital movements
Long term capital movements Changes in gold & exchange reserves Short term capital movements:
Purchase of short term securities- treasury bills,
commercial bills etc Speculative purchase of foreign currency Cash balances held by foreigners Net balances(positive or negative) in current
account
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Long term capital transactions:
Direct investments in shares, bonds & in real
estate & physical assets- plants, buildings,
equipments etc International capital movements with maturity
of one year or more, portfolio investment like
purchase of foreign bonds & stocks &international loans
Short term international capital transactions -
for a period from 3 mths to less than a yr
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Two types of transactions in capital account:
Private & Government
Private include all types of investment :direct,portfolio & short term
Government include loans to & from officialagencies
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Borrowings from foreign countries & direct investment by
foreign countries represent capital inflows
They are positive items or credits as they are receipts from
foreigners Lending to foreign countries & direct investments in foreign
countries represent capital outflows
They are negative items or debits as they are payments toforeigners
The net value of balances of short term & long term direct& portfolio investments is balance oncapital account
Basic balance: the sum ofcurrent account & capital
account is basic balance
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Also called Official Reserve Account is in fact
a part of the capital account
In US & UK it is shown as a separate account The official reserve assets of a country
include its gold stock, holdings of itsconvertible foreign currencies & SDRs & its
net position in the IMF
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This is a balancing item so that total credits &
debits of the three accounts must equal in
accordance with principle of double entrybook keeping so that balance of payments
always balances in the accounting sense
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Total receipts during the reference period
need not always necessarily be equal to the
total payment obligations of that period When it does not match there is
disequilibrium
Deficit or surplus in BOP
