Balance of Payments (BOP) Definition: Balance of payments is systematic record of all economic transactions completed between the residence

of a country and the residence of the rest of the world. Surplus in (BOP): If the receipts of a country are greater than its payments the result is Surplus.Receipts > Payments Balance in (BOP): If the receipts of a country and its payments are equal the result is Balance.Receipts = Payments Deficit in (BOP): If the receipts of a country are less than its payments the result is Deficit.Receipts < PaymentsSimply whenever, the foreign payments of a country are more than the foreign receiptsof the country, the deficit in BOP rises. In other words, whenever the demand for foreignexchange is more than the supply of foreign exchange the deficit in BOP occurs.

Causes of Deficit in (BOP)

The causes of deficit in BOP are as under: I.Income Type of Disequilibrium: The deficit may arise because of changes in income level of a country. If in acountry the incomes are rising more than the rest of the world, because of rise in incomesthe consumption in the country will increase and the exports will decrease. In this wayforeign receipts will come down and deficit in BOP occurs. II.Price Type of Disequilibrium: The changes in price level are also responsible for BOP deficit. If in a countrydue to demand-pull inflation or cost-push inflation, the price level rises, the domestic products will become expensive. In this way, the exports of a country may fall and theimports of a country may increase. In this way, receipts will come down and paymentswill increase and caused for deficit in BOP. III.Capital Movement: The capital movement is also responsible for deficit in BOP. As due to politicalinstability the domestic capital is flowing out then the foreign payments of a country mayincrease. If the foreign capital is not coming to the country, the receipts of a country mayalso go down. Thus the changes in capital movement at capital accounts of BOP are alsoresponsible for deficit in BOP. IV.Structural Changes: The structural changes which occur in an economy are also responsible for deficit in BOP. They are as: If in a country, the population increases, the exports will decrease and importswill increase. If in a country, the natural resources are depleted the exports may come down. If in the world, the substitutes are developed, they may have the effect o f reducing the exports of a country. If a country is engaged in the process of economic development, it has to importmachinery, raw material and a variety of goods. In this way the country willhave to spend foreign exchange on their importation.

Measures to Remove Deficit in BOP

Simply to remove deficit in BOP, a country should increase its exports and decrease itsimports. They are discussed below: I.To Give Subsidies to Exporters: -

Any country which faces deficit in BOP should give subsidies to the exporters. Theymay also consist of granting of loans at reduced rates to the exporters as well as providinginsurance facilities and shipment services etc. Moreover, if countries follow the policy of subsidizing the other countries may also follow it. In this way the benefits of subsidieswill not be availed. II.Restrictions on Imports: Any country which faces deficit in BOP may also impose restrictions on imports byincreasing the import duties, imposition of exchange control etc. In this way the importswill decrease. III.Deflation: The country which is facing deficit in BOP should follow the policy of deflation.T h i s policy can be adopted with the help of tight fiscal policy by decreasing G o v t . expenditures and increasing taxes. This will have the effect of decreasing the incomesand expenditures of the people. In this way, there will be a deflation in the economy. As aresult the imports will decrease and exports will increase IV.Devaluation: In 1994, the World Monetary Conference was held at Brettonwoods. In this conference itwas decided that Pound Sterling (), Dollar ($) and gold will be used for internationaltransaction. The rate of exchange so determined would remain fixed. However, a countrywhich faces deficit in BOP was allowed to devaluate its currency up to 10% without p e r m i s s i o n o f I n t e r n a t i o n a l M o n e t a r y F u n d ( I . M . F ) a n d m o r e t h a n t h i s w i t h t h e permission of IMF. In this way the exports will i n c r e a s e a n d i m p o r t s w i l l d e c r e a s e . Accordingly, the deficit will be cured. V.International Monetary Fund (I.M.F): As the international level, the institution named as IMF has been set up. This institutionhas been assigned to perform the following functions: To serve as a pool of international reserves. To keep an eye on exchange rates of currencies. To provide assistance to those countries who face persistent deficit in their BOP.I n t h i s respect IMF has initiated a lot of and with the help of these farcicalities t h e member of IMF who faces deficit in BOP, can get loan from IMF and use it to remove itsdeficit. VI.Depreciation: Under Brettonwood System it was decided that the rate of exchange betweenc u r r e n c i e s w i l l r e m a i n f i x e d . B u t i n 1 9 7 1 , A m e r i c a n P r e s i d e n t N i x o n s u s p e n d e d t h e convertibility of Dollar into gold. Thus, since 1973, the world is having the managedFlexible Exchange Rate of System. Under Flexible System, the deficit in the BOP isautomatically washed through the policy of Depression. VII.Appreciation: The policy of appreciation is opposite to that of depreciation. It comes into beingwhen the country faces surplus in BOP under the flexible exchange rate system.