Balance of Payments

BALANCE OF PAYMENTS
It is a double entry system of record
of all economic transactions between
the residents of the country and the
rest of the world carried out in a
specific period of time.
It takes into account the export and
import of both visible and invisible
items.
The balance of payments of a country is a
systematic record of all economic transactions
between the residents of the reporting country
and the residents of foreign countries during a
given period of time. It is an important index,
which reflects the true economic position of a
country, whether the country is a creditor
country or a debtor country, and whether its
currency is rising or falling in its external value.
There are various types of monetary transactions
that take place between two countries:
The export and import of a goods and services
The international lending and borrowing
Servicing of foreign debts and their final
repayments.
 BOP statement includes
All the receipts on account of goods
exported
Services rendered
Capital received by residents
Payments of residents
Capital transferred to foreign
Components of Balance of
Payments
Current
account
Capital
account
 Current Account
It includes visible exports and imports,
and invisible items like receipts and
payments for various services.
It contains credit and debit items.
Credit includes merchandise exports and
invisible exports.
Debit includes merchandise imports and
invisible imports.
 The Current Account includes all transactions which give rise
to or use up national income.
The Current Account consists of two major items, namely:
i) Merchandise exports and imports, and
ii) Invisible exports and imports.
Merchandise exports, i.e., the sale of goods abroad, are credit
entries because all transactions giving rise to monetary claims
on foreigners represent credits. On the other hand, merchandise
imports , i.e., purchase of goods from abroad, are debit entries
because all transactions giving rise to foreign money claims on
the home country represent debits. Merchandise imports and
exports form the most important international transaction of
most of the countries .Invisible exports, i.e., sales of services,
are credit entries and invisible imports, i.e. purchases of
services, are debit entries. Important invisible exports include
the sale abroad of such services as transport, insurance, etc.,
foreign tourist expenditure abroad and income paid on loans and
investments (by foreigners)in the home country form the
important invisible entries on the debit side.
 Capital Account

The Capital Account consists of short- terms and long-

term capital transactions A capital outflow represents a
debit and a capital inflow represents a credit. For
instance, if an American firm invests Rs.100 million in
India, this transaction will be represented as a debit in
the US balance of payments and a credit in the balance
of payments of India. The payment of interest on loans
and dividend payments are recorded in the Current
Account, since they are really payment s for the
services of capital. As has already been mentioned
above, the interest paid on loans given by foreigners of
dividend on foreign investments in the home country
are debits for the home country, while, on the other
hand, the interest received on loans given abroad and
dividends on investments abroad are credits.