Balance of payments

What is BOP?
 It is the summary of flow of economic transactions
between the residents of a country and the rest of
the world during a given time period.
 It is similar to sources and uses of funds statement
for a company.
 It measures the flow of international payments and
receipts.
 It records only changes in the levels (not the
absolute level) of international assets and liabilities.

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What is BOP?
 BOP is described by the IMF in its BOP Manual as
a statistical statement for a given period showing:
 Transactions in goods, services and income between an
economy and the rest of the world;
 Changes of ownership and other changes in the economy’s
monetary gold, SDRs, and claims and liabilities to the rest of
the world; and
 unrequited transfers and counterpart entries that are needed
to balance, in the accounting sense, any entries for the
foregoing transactions and changes which are not mutually
offsetting.
 BOP manual prescribes the principles and
concepts to be followed by the member countries
while preparing BOP data.
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Components of Balance of Payments

Balance of payments account is based on the ‘standard

double entry system’ of book keeping. Thus, every
entry is entered twice, once as a credit item and once
as a debit item. A transaction which increases the
external purchasing power of a country is recorded as a
credit entry. It represents a source of foreign exchange.
A transaction which reduces the external purchasing
power of the country is recorded as a debit entry. It
shows the use of foreign exchange reserves.
 Current Account
 Capital Account
 Monetary Movements
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Current Account

The current account records all the

merchandise and invisible transaction around
the world. It effectively captures the trading
pattern across the countries. Current account
has two components, merchandise
transactions and invisible transactions.

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India’s Overall Balance of Payments
Credit Debit Net
A. CURRENT ACCOUNT
1. MERCHANDISE
a. Exports (on f.o.b. basis)
b. Imports (on c.i.f. basis)
2. INVISIBLES (a + b + c)
a. Services
i. Travel
ii. Transportation
iii. Insurance
iv. G.n.i.e.
v. Miscellaneous
b. Transfers
vi. Official
vii. Private
c. Investment Income

Total
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Capital Account

Capital account depicts the movements

of foreign capital in and out of the
country. Capital account has the
following components.

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 Credit Debit Net
B. CAPITAL ACCOUNT
1. FOREIGN INVESTMENT (a + b)
a. In India
i. Direct
ii. Portfolio
b. Abroad
2. LOANS
a. External Assistance
b. Commercial Borrowings (MT and LT)
c. Short Term
3. BANKING CAPITAL (a + b)
a. Commercial Banks
b. Others
4. RUPEE DEBT SERVICE
5. OTHER CAPITAL

Total Capital Account (1 + 2 + 3 + 4 + 5)

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 Credit Debit Net
A. CURRENT ACCOUNT
B. CAPITAL ACCOUNT
C. ERRORS AND OMISSIONS
D. OVERALL BALANCE (A + B + C)
E. MONETARY MOVEMENTS (i + ii)
i. I.M.F.
ii. Foreign Exchange Reserves
(Increase -/ Decrease +)

Balance in Current Account + Balance in Capital Account

+ Change in Monetary Movements = Zero

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Factors influencing BOP
 Exports
 Current exchange rate of home currency - a lower
value results in domestic price getting translated into
a lower international price and vice versa.
 Inflation rate-higher the inflation, lower
competitiveness and lower the demand for domestic
goods and vice versa.
 World prices of a commodity-an increase in the world
price of a commodity, the value of exports for that
commodity will increase and vice versa.
 Income of foreigners
 Trade barriers

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Factors influencing BOP
 Imports
 Value of domestic currency- opposite effect as for
exports
 Level of domestic income-an increase in income
levels increases demand for both domestic and
imported goods
 International prices-a higher international price gets
translated into higher domestic price and vice versa.
Demand for imports depends on the elasticity of
demand.
 Inflation rate
 Trade barriers.

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Importance of BOP statistics

 Forecasting exchange rates can be made if the

factors affecting demand & supply of a currency are
known.
 A careful study of the factors influencing different
components of BOP and of the economic factors the
world over can prove quite handy for predicting the
direction if not the magnitude.
 A movement in the reserve position of a country can
also provide some indications as to the likely
movement of exchange rates
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Importance of BOP statistics

 For example, a continuous overall BOP

deficit could mean downward pressure on the
value of the home currency. If reserves are
used defend the home currency, the reserves
will deplete.
 On the contrary, continuous BOP surplus
may lead to build up of reserves. This could
result in strengthening of home currency.

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