Assignment

On
“Balance of Payment”

Course Title: Foreign Trade Management

Course Code: FCC 310

Submitted to:

Kazi Sirajum Munira

Lecturer

Department of Management

University of Chittagong

Submitted by:

Group Name: OPTIMISTIC

No. Members Name ID NO.

1. MD. Farhat Hossain 17302030
2. Raihan Jamil 17302074
3. Mahamudul Alam 17302052
4. Dabesh Chandra Paul 17302053
5. Himel Saha 17302071

Date of Submission: 17/07/2019

 Table of Contents

No. Contents Page Number

1. Introduction

2 Components of Balance of Payment

3. Balance of Payment Situation in Bangladesh

4. Balance of Payment Situation in India

5. Balance of Payment Situation in Brazil

6. Conclusion

7. References
 Introduction

The balance of payments is the record of all international trade and financial transactions
made by a country's residents. A country's balance of payments tells you whether it saves
enough to pay for its imports. It also reveals whether the country produces enough economic
output to pay for its growth. The BOP is reported for a quarter or a year.

A balance of payments deficit means the country imports more goods, services and capital
than it exports. In the short-term, that fuels the country's economic growth. In the long-term,
the country becomes a net consumer, not a producer, of the world's economic output. It will
have to go into debt to pay for consumption instead of investing in future growth. If the
deficit continues long enough, the country may have to sell off its assets to pay its creditors.
These assets include natural resources, land, and commodities.

A balance of payments surplus means the country exports more than it imports. Its
government and residents are savers. A surplus boosts economic growth in the short term. It
has enough excess savings to lend to countries that buy its products. The increased exports
boosts production in its factories, allowing them to hire more people. In the long run, the
country becomes too dependent on export-driven growth. A larger domestic market
will protect the country from exchange rate fluctuations. It also allows its companies to
develop goods and services by using its own people as a test market (J. Singh)
 Components of Balance of Payment

Balance of payments has three components. They are the current account, the financial
account, and the capital account.

1. Current Account: The current account measures a country's trade balance plus the
effects of net income and direct payments. This part of the balance of payments is
regarded as the most important, as it shows a nation’s trading strength. If payments
are greater than receipts, there is a deficit which is undesirable. This account includes
two types of trade:

 Visible Trade: Trade in goods. The money earned from exports of goods (e.g., cars
sold to Nepal) is credited (added) to this account, whilst payments for imported goods
(e.g., American aircraft sold in India) are debited. The difference between the totals is
known as the Balance of Trade.
 Invisible Trade: Trade in services. The income earned from the sale of Bangladeshi
services abroad is known as an invisible export, e.g., an insurance premium paid by a
British ship-owner to an Bangladeshi broker. When Bangladeshi residents spend
money on foreign services, e.g., a week’s accommodation in London, they are
creating invisible imports, because payment is going out of Bangladesh. The main
invisibles are as follows:
 Government Expenditure
 Interest, Profits and Dividends
 Transport
 Tourism
 Private Transfers

2. Capital Account: The capital account measures financial transactions that

don't affect a country's income, production, or savings. This account includes
investment and other capital movements. Outflows create deficits (-) and inflows give
surpluses (+) in the account. For instance, if an Indian trader purchases a new shop in
London, this is an outflow of capital. Conversely, if Toyota (Japan) builds a
showroom in Bangalore, then there is a capital inflow (J.singh). The main
components of capital account are:
  Borrowings and Lending to and from abroad
 Investment to and from abroad
 Change in Foreign Exchange Reserves

3. The Financial Account: The Financial Account measures-

 changes in domestic ownership of foreign assets

 foreign ownership of domestic assets

If foreign ownership increases more than domestic ownership does, it creates a deficit in the
financial account. This means the country is selling off its assets, like gold, commodities, and
corporate stocks, faster than it is acquiring foreign assets (J. Singh). If the domestic
ownership of foreign assets portion of the financial account increases, it increases the overall
financial account. If the foreign ownership of domestic assets increases, it decreases the
overall financial account; the overall financial account increases when the foreign ownership
of domestic assets decreases (Kenton W).

Balance of Payment Situation in Bangladesh

Balance of Payment Bangladesh

July- May 2018

1 Current Account (in million (in million

us$) us$)

Total Total

Goods and services -17897

Primary income -2753

Secondary income 15475

 Current Account Balance: -5175

2 Capital Account

Capital transfers 217

Capital Account Balance: 217

3 Financial account

Foreign direct investment 3837

Portfolio investment 162

Medium and long-term loan 4975

Trade credit -2705

DMBs and NBDCs 135

Financial Account Balance: 6404

Here, we see that the current account balance is in deficit position where BD import much
goods and services (17897 US$) from abroad. But in case of Capita account and Financial
account Bangladesh is in surplus position, where much surplus has in medium and long term
loan (4975 US$).

Data Source: Bangladesh Bank (Jul-May 2018)

 Balance of Payment Situation in India

Balance of Payment India

Jan- Mar 2019

(US$ Million)

Total Net Balance

(i) Current Account:

1 Goods and Services -13883

2 Primary Income -6925

3 Secondary income 16179

Current Account Balance -4629

(ii) Capital Acccount:

1 Gross acqusition of non-produced -81

no financial assets

2 Capital Transfers -6

3 General Government -19

4 Other Capital Transfers -19

5 "Financial, non-financial corporations 16

Households and NPISHS

6 Other Capital Transfers Including 16

Migrants transfers

Capital Account Balance -87

(iii) Financial Account:

1 Direct Investment 6420

2 Portfolio Investment 9436

3 Financial derivatives and employee 739

stock options

4 Other investments 2711

5 Reserve Assets -14162

Financial Account Balance 5144

Data Source: Reserve Bank of India (Jan-Mar 2019)

Latest Data shows India has a $4629 million deficit in Current Account. From the above table
we have seen that India has a large deficit in Goods and Services ($13883 million), on the
other hand india has also surplus in secondary income ($16179 million). India’s exports
which is much lower than imports, which is the main cause of Current Account deficit.
Another major component of India’s deficit is Foreign Investment income where profits are
repatriated to a company’s origin country. India is in surplus in a net gainer of remittances.

Latest Data shows that India has a $87 million deficit in Capital Account. The deficit areas
are -Gross Acquisition, Capital Transfers, General government. India is in surplus in areas
such as- Financial and non- financial corporations and other capital transfer including
migrants transfers. India has a large deficit in Gross Acquisition (-$81 million), but it has a
large surplus in Financial and non-financial corporations and NPISHs ($16 million).
Latest Data shows that India has a $5144 million surplus in Financial Account. India is in
surplus in areas such as- Direct and Portfolio investment, Financial derivatives and employee
stock options. But they are still in deficit position in reserve assets. India has a large surplus
in Portfolio investment ($9436 million), but has a large deficit in Reserve assets (-$14162
million).

Balance of Payment Situation in Brazil

Balance of Payment Brazil

Jan-Mar 2018

Net Balance (US$ Billion)

1. Current Account

Net Balance (US$ Billion)

1.Goods and Service 13.3

2.Primary Income -45.8

3.Secondary income 2.5

Total -30.0

2. Capital Account

1.Capital Account 0.4 0.4

3. Financial Account

1.Investments-assests 72.7

2.Investment-liabilities 106.3

3.Loans and Debt (long Term) -2.0

 4.loans And Debt (Short Term) -2.0

Other -2.0

Total 173.0

Here, we see that the Current Account Balance is deficit position where Brazil Import much
products from abroad. But, In Case of Capital and Financial account Brazil is in surplus
position.

Data Source: Banco Central do Brazil (Jan-Mar 2018)

Conclusion

The balance of payments is very important for a country to try and keep equal. To low and
you have a deficit to where you borrow money and to high and you’re in a surplus which if
taken lightly can actually lead to a deficit. BOP accounts will always balance when all types
of payments are included, imbalances are possible on individual elements of the BOP, such as
the current account, the capital account excluding the central bank's reserve account, or the
sum of the two. Imbalances in the latter sum can result in surplus countries accumulating
wealth, while deficit nations become increasingly indebted. The term "balance of payments"
often refers to this sum: a country's balance of payments is said to be in surplus (equivalently,
the balance of payments is positive) by a certain amount if sources of funds (such as export
goods sold and bonds sold) exceed uses of funds (such as paying for imported goods and
paying for foreign bonds purchased) by that amount. There is said to be a balance of
payments deficit (the balance of payments is said to be negative) if the former are less than
the latter.
 References

1. Published by Kimberly Amaded, Balance of Payments, its components and Deficit vs

Surplus, May 29, 2019., Retrieved at https://www.thebalance.com/what-is-balance-
of-payments-components-and-deficit-3306278
2. Published by Will Kenton, Balance of Payments (BOP), Feb 11, 2019., Retrieved at
https://www.investopedia.com/terms/f/financial-account.asp
3. Published by J.Singh, Balance of Payment Account: Meaning, Features and
Components (N.D)., Retrieved at
https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.economics
discussion.net/balance-of-payment/components/3-main-components-of-balance-of-
payment
discussed/12778&ved=2ahUKEwiAptWX9bDjAhWLpI8KHVrJDO8QFjAJegQIA
RAB&usg=AOvVaw0HIGbqhViPPkCpGvhieY7L&cshid=1562987678930

4. Inflation Report, Banco Central do Brazil, 2017-18., Retrieved at www.bcb.gov.br

5. Balance of Payment, Bangladesh Bank economic data 2017-18., Retrieved at
https://www.bb.org
6. Balance of Payment, Press Release-RBI, Reserve Bank of India 2018-19., Retrieved at
https:// m.rbi.org.in