BALANCE OF PAYMENT

Presentation on Balance Of Payment

(BOP)
 Cont…
• Balance of payments (BOP) accounts are an accounting record of
all monetary transactions between a country and the rest of the
world. These transactions include payments for the country's
exports and imports of goods & services, financial capital, and
financial transfers.
• A country has to deal with other countries in respect of 3 items:
• Visible items which include all types of physical goods exported
and imported.
• Invisible items which include all those services whose export and
import are not visible. e.g. transport services, medical services etc.
• Capital transfers which are concerned with capital receipts and
capital payment.
 Cont….
.Definition-
According to Kindle Berger, "The balance of
payments of a country is a systematic record of all
economic transactions between the residents of the
reporting country and residents of foreign countries
during a given period of time".
 4. Features
•It is a systematic record of all economic transactions
between one country and the rest of the world.
• It includes all transactions, visible as well as
invisible.
•It relates to a period of time. Generally, it is an
annual statement.
•It adopts a double-entry book-keeping system. It has
two sides: credit side and debit side. Receipts are
recorded on the credit side and payments on the debit
side.
 Double-entry Accounting in the BOP

• All transactions are either debit or credit

transactions
• Credit transactions result in receipt of
payment from foreigners
– Merchandise exports (valued f.o.b.)
– Transportation and travel receipts
– Income received from investments abroad
– Gifts received from foreign residents
– Aid received from foreign governments
 Double-entry Accounting (Cont’d)
• Debit transactions involve to payments to foreigners
– Merchandise imports
– Transportation and travel expenditures
– Income paid on investments of foreigners
– Gifts to foreign residents
– Aid given by home government
– Overseas investments by home country residents
• Each credit transaction has a balancing debit
transaction, and vice versa, so the overall balance of
payments is always in balance.
 5. Components of BOP
1. Current Account Balance :- BOP on current account
is a statement of actual receipts and payments in
short period. It includes the value of export and
imports of both visible and invisible goods.
• There can be either surplus or deficit in current
account.
• The current account includes:- export & import
of services, interests, profits, dividends and
unilateral receipts/payments from/to abroad.
 Current Account
• The current account is that balance of
payments account in which all short-term
flows of payments are listed:
– Goods and services balance (exports – imports)
• Merchandise trade balance (exports – imports)
• Services balance (exports – imports)
 What are Services?
• Travel and tourism
• Trade transportation
• Insurance
• Education
• Financial, technical, and marketing services
• Telecommunication
• Use of property rights (royalties)
• Other professional and consulting services
 2. Capital Account Balance
 It is difference between the receipts and
payments on account of capital account. It refers
to all financial transactions.
 The capital account involves inflows and outflows
relating to investments, short term
borrowings/lending, and medium term to long
term borrowing/lending.
 There can be surplus or deficit in capital account.
 It includes: - private foreign loan flow, movement
in banking capital, official capital transactions,
reserves, gold movement etc.
 Capital Account
• The capital and financial account is that balance of
payments account in which all cross-border
transactions involving financial assets are listed.
This includes transactions between foreign and
domestic residents, and foreign and domestic
governments.
– All purchases or sales of assets, including:
• Direct investment
• Securities (debt)
• Bank claims and liabilities
• Official reserves transactions
• When U.S. citizens buy foreign securities or when foreigners
buy U.S. securities, they are listed here as outflows and inflows,
respectively.
 Foreign Direct Investment (FDI)
• Any flow of lending to, or purchases of ownership in, a
foreign enterprise that is largely owned by residents of the
investing country.
– Securities (stocks and bonds)
– Loans
– Bank deposits
– Minority ownership positions
• FDI is the purchase of assets to establish financial control of a
foreign entity. Generally ownership of 10% or more of a
company’s outstanding stock is considered FDI.
• Portfolio investment involves little management control or
interest, and is solely for financial gain.
 Official Reserve Assets
• Early on in this century, this was primarily gold
• Now primarily financial assets denominated in
a foreign currency that is widely accepted in
international transactions:
– Euro assets (heavily used by U.S.)
– Yen assets (heavily used by U.S.)
– U.S. dollar assets (key currency worldwide)
– Reserve positions in IMF
– SDRs (created by IMF)
 Overall BOP -:
• Total of a country’s current and capital account is
reflected in overall Balance of payments.
• It includes errors and omissions and official reserve
transactions.
• The errors may be due to statistical discrepancies &
omission may be due to certain transactions may
not be recorded.
• For e.g.: A remittance by an Ethiopian working
abroad to Ethiopian may not yet recorded,
• The errors and omissions amount equals to the
amount necessary to balance both the sides
 Statistical Discrepancy?
• It is the net result of errors and omissions on
both the credit and debit sides.
• Where do these errors come from?
– Under-reporting merchandise imports
– Under-reporting investment incomes
– Under-reporting capital exports
– Basically, people succeed in hiding their imports,
foreign investment incomes, capital flight from
their governments for tax and other purposes.
 BOP Surplus and Deficit (Continued)
• In terms of the supply and demand of a
nation’s currency, there is:
– A balance of payments surplus if quantity
demanded for a currency exceeds quantity
supplied, putting upward pressure on the value
of the nation’s currency.
– A balance of payments deficit if quantity
supplied of a currency exceeds quantity
demanded, putting downward pressure on the
value of the nation’s currency.
 Causes of Disequilibrium
Includes
• Natural causes – e.g. floods, earthquake etc.
• Economic causes – e.g. Cyclical Fluctuations,
Inflation, Demonstration Effect etc.
• Political causes – e.g. international relation,
political instability, etc.
• Social factors – e.g. change in taste and
preferences etc. 1.