BALANCE OF PAYMENTS

CONTENT
A. B. C. D. Definition. Importance of BOP. Structure of BOP Accounts: Current account Capital account Official settlement account Errors and omissions Equilibrium in BOP. Measuring Deficit and Surplus of BOP. Balance of Trade and BOP. Disequilibrium in BOP. Causes of Disequilibrium.

 Balance of Payments of a country is a systematic record of all its transactions with the outside world in a given year. Thus it includes: The accounts that record a nations international financial transactions. All financial transactions between a country and the rest of the world over a year. Double-entry bookkeeping system.

 Balance of payment may be written as:

B=Rf-Pf
Where B= Balance of Payments Rf =Receipts from foreigners. Pf =Payments made to foreigners

IMPORTANCE OF BOP
The BoP is an important indicator of pressure on a countrys foreign exchange rate . The BOP helps to forecast a countrys market potential. Changes in a countrys BOP may signal the imposition or removal of controls over payment of dividends and interest, license fees, royalty fees, or other cash disbursements to foreign firms or investors.

STRUCTURE OF BOP
BOP of a country is constructed on the principle of double-entry book keeping. Each transaction is entered on the credit & debit side of the balance sheet.

If the debits exceed the credits, then a country is running a trade deficit. If the credits exceed the debits, then a country is running a trade surplus.

They are composed of the following:

The Current Account The Capital Account The Official Settlement Account Errors and Omissions

CONTD..
CREDITS(+) (RECEIPTS)
EXPORTS
1.CURRENT a. b. c. Goods Services Transfer Payments 2.CAPITAL A .Borrowings from foreign countries B .Direct Investments by foreign countries 3.OFFICIAL SETTLEMENT a. Increse in Foreign Official Holdings 4.ERRORS

DEBITS(-) (PAYMENTS)
IMPORTS
ACCOUNT a. Goods b. Services c. Transfer Payments ACCOUN T A .Lending to Foreign Countries b. Direct Investments in Foreign Countries ACCOUNT a. Increase in Official Reserve of Gold and Foreign Currencies AND OMMISSIONS

CURRENT ACCOUNT
Includes all imports and exports of goods and services. Includes unilateral transfers of foreign aid.

CAPITAL ACCOUNT
The capital account measures the difference between sales of assets to foreigners and purchases of foreign assets. The capital account is composed of Foreign Direct Investment (FDI), portfolio investments and other investments.

OFFICIAL SETTLEMENT ACCOUNT

Net foreign direct investment Net portfolio investment Other financial items Official reserves assets include gold, foreign currencies.

ERRORS AND OMISSIONS

Balancing item so that total credit and debits of the three accounts must equal in accordance with the principle of double entry book keeping so that BOP of a country always balances.

EQUILIBRIUM IN BOP
B= Rf Pf = 0 = equilibrium
Where B= Balance of payments Rf= Receipts from foreigners Pf= Payments made to foreigners.

MEASURING DEFICIT AND SURPLUS IN BOP

If RfPf>0
Receipts from foreigners exceed payment made to foreigners

Surplus in BOP

If RfPf<0

Payments made to foreigners exceed receipts from foreigners

Deficit in BOP

BALANCE OF TRADE AND BOP

All the countries of the world depend on each other for the goods and services. International trade constitutes the import and export of services and goods. The difference between the values of imports and exports is called balance of trade. If imports are greater than exports, it is deficit and if export is greater than import it is surplus. Balance of payment is another term which is used in international economics.

DIFFERENCE BETWEEN BOT AND BOP

BASICS OF DIFFERENCE 1. Definition BOT
Balance of trade may be defined as difference between export and import of goods and services.

BOP
Balance of payment is flow of cash between domestic country and all other foreign countries. It includes not only import and export of goods and services but also includes financial capital transfer
BOP = BOT + (Net Earning on foreign investment - payment made to foreign investors) + Cash Transfer + Capital Account +or - Balancing Item or BOP = Current Account + Capital Account + or Balancing item ( Errors and omissions) Balance of Payment will be favorable, if you have surplus in current account for paying your all past loans in your capital account. Balance of payment will be unfavorable, if you have current account deficit and you took more loan from foreigners. After this, you have to pay high interest on extra loan and this will make your BOP unfavorable.

2. Formula

BOT = Net Earning on Export - Net payment for imports

3. Favorable or Unfavorable

If export is more than import, at that time, BOT will be favorable. If import is more than export, at that time, BOT will be unfavorable

4. Solution of Unfavorable Problem

To Buy goods and services from domestic country.

To

stop taking of loan from foreign countries

5. Factors

Following are main factors which affect BOT a) cost of production b) availability of raw materials c) Exchange rate d) Prices of goods manufactured at home

Following are main factors which affect BOP a) Conditions of foreign lenders. b) Economic policy of Govt. c) all the factors of BOT

DISEQUILIBRIUM IN BOP
A disequilibrium in the BOP of a country may be either a deficit or a surplus. Deficit or surplus in BOP of a country appears when credits do not match with debits. If credit receipts exceeds debit payments, there is surplus in the BOP and disequilibrium said to be favorable. If debit payments exceeds credit receipts, there is a deficit in the BOP and the disequilibrium is said to be unfavorable or adverse.

CAUSES OF DISEQUILIBRIUM
There are many factors that may lead to BOP deficit or surplus: Temporary disequilibrium. Fundamental disequilibrium. Structural changes Changes in exchange rate Changes in National Income Price Changes Stage of Economic Development Capital movement Political conditions.

Thank you
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