Welcome

Welcome
to
Welcome to

Welcome
to
Balance
of
Payments
Welcome to

International Trade

International trade refers to trade

between the residents of two different
countries

International Trade
The exporter requires payment in the
currency of the exporters country
whereas the importer can pay only in
the currency of the importers country
A need, therefore, arises for conversion
of the currency of the importer's
country into that of the exporters
country

Foreign Exchange
Foreign exchange is the mechanism by
which the currency of one country
gets converted into the currency of
another country
The conversion of currencies is done
by banks who deal in foreign exchange

Foreign Exchange
The rate at which one currency is
converted into another currency is the
rate of exchange between the
currencies concerned
The banks operating at a financial
centre and dealing in foreign exchange
constitute the foreign exchange
market

Foreign Exchange as Stock

In another sense, the term foreign
exchange is used to refer to the very
balance held abroad
FEMA, 1999: foreign exchange
includes foreign currency, balances
kept abroad, instruments payable in
foreign currency and instruments
drawn abroad but payable in Indian
currency

Balance of Payments

Balance of payments ( BOP ) is the

systematic summary of the economic
transactions of the residents of a
country with the rest of the world
during a specified time period, normally
a year

Features of BoP Statement

Economic Transactions:
An economic transaction arises when
values are exchanged or moved
between nations
Theses may arise from:
a. movement of goods in the form of
exports and imports
b. rendering of services abroad and
using foreign services

Features of BoP Statement

Economic Transactions:
c. Gifts/grants from one country to
another
d. Investments made abroad or
received from abroad
e. Income on investments received
from abroad or remitted abroad
f. Increase/ decrease in the
international reserves of the country

Features of BoP Statement

Transactions between residents with
Non-residents.
A Flow Statement.
Periodicity.

BoP Statement
In compilation of balance of payments,
double entry principle of accounting is
used
Currency Inflows Credits
( earn foreign exchange)

Currency Outflows Debits

( expend foreign exchange)

BoP Statement
BOP statement is presented with three
major components:
i) Current Account
ii) Capital Account
iii) Official Reserve Account

BALANCE
BALANCEOF
OF
PAYMENTS
PAYMENTS

Current
Account

Official Reserve
Account

Capital
Account

Foreign
Direct
Investment (FDI)

Portfolio
Investment

Private
Short-term
Capital Flows

Decrease or
increase in
foreign
exchange
reserves

Goods account: Exports & Imports

Services account: Travel, transportation, Insurance etc.
Unilateral transfers: Gifts, donations & subsidies
Investment Income : Interest, Dividends etc.

BOP Accounting
1. Export of goods USD 200 Mn. realisation
deposited in bank abroad
2. Import of goods USD 150 Mn. payment
made from bank account abroad
3. Amount spent by foreign tourists in the
country USD 40 Mn.
4. Received goods as gift from another country
USD 60 Mn.
5. Export of commodities for USD 80 Mn. On a
government deal payment in gold by the
importing countrys government

Balance of Payments
(USD
Million)

Credit (+)

Debit
(-)

+170

A. CURRENT ACCOUNT
1. Merchandise
2. Trade

Trade

in Services

3. Unilateral

Transfers

Balance

280

210

+70

40

+40

60

+60

B. CAPITAL ACCOUNT

Bank balances abroad

C. OFFICIAL RESERVE ACCOUNT

150

240

-90

80

-80

Importance of BOP
a. Judge economic and financial status of
a country in the short-term
b. Deficit signifies a tendency to take stiff
measures for diminishing imports,
exchange control and restrictions on
repatriation of dividends/ interest

Importance of BOP
c. Consistent BOP deficit has an
unfavourable effect on exchange rate
depreciation of the currency
d. Central bank intervenes through its
regulatory stock to control volatility of
exchange rate

Link between the National Economy &

International Activities
National Income = Consumption +
Savings
National Spending = Consumption +
Investment
So,
National Income National Spending =
Savings Investment
If a nations income exceeds its spending,
savings will exceed domestic investment

Link between the National Economy &

International Activities
A nation that produces more than
it spends will save more than it
invests domestically and will have
a net capital outflow
This capital flow will appear as a
combination of capital account
deficit and an increase in official
reserves

Indias Overall Balance of Payments

(` crore)
Item

A.

2010-11 P

Credit

Debit

Net

Credit

Debit

Net

10

11

12

CURRENT ACCOUNT
I. MERCHANDISE

8,62,333

14,23,079

-5,60,746

11,39,517

17,34,545

-5,95,028

II. INVISIBLES (a+b+c)

7,74,512

3,94,392

3,80,120

8,99,484

5,06,990

3,92,494

16,36,845

18,17,471

-1,80,626

20,39,002

22,41,534

-2,02,532

1. Foreign Investment (a+b)

9,43,447

6,99,806

2,43,641

13,04,426

11,32,272

1,72,154

2. Loans (a+b+c)

3,49,720

2,88,047

61,673

4,86,050

3,59,057

1,26,993

3. Banking Capital (a+b)

2,92,105

2,82,261

9,844

4,19,277

3,97,252

22,025

452

-452

313

-313

54,300

1,16,874

-62,574

45,781

93,507

-47,726

16,39,572

13,87,440

2,52,132

22,55,534

19,82,401

2,73,133

7,269

-7,269

11,152

-11,152

32,76,417

32,12,180

64,237

42,94,536

42,35,087

59,449

Total Current Account (I+II)

B.

2009-10 PR

CAPITAL ACCOUNT

4. Rupee Debt Service

5. Other Capital
Total Capital Account (1to5)
C.

Errors & Omissions

D.

Overall Balance (A+B+C))

Source: Reserve Bank of India

Balance of Trade
The balance of trade is the difference
between the monetary value of exports and
imports of output in an economy over a
certain period
It is the relationship between a nation's
imports and exports
A positive balance is known as a trade
surplus and a negative balance is referred
to as a trade deficit or, informally, a trade
gap

Indias
International Trade

Indias
International Trade

Indias
International Trade

GOOD LUCK TO YOU