M.A (International Economics),Ph.

D ,PGDAS
 1.Current Account
2.Capital Account
3.Disequlibrium & Corrective Methods
DEFINITION OF BOP
‘Balance of payments is a systematic
record of economic transactions of the
residents of a country with the rest of
the world during a given period of
time.’
 A.CURRENT ACCOUNT-2TYPES

MERCHANDISE
Value of Goods exported-Value of Goods imported
INVISIBLE S
1.Non-Factor Services -Net
Travel-Net
Transportation-Net
Insurance-Net
G.n.i.e -Net
Miscellaneous (Software related ,business & financial
Services)- Net
INVISIBLES – CONTI---
2.Transfers
Private Transfers – Net
Official Transfers – Net
3.Income- Net
Investment Income - Net
Compensation of Employees - Net

TOTAL INVISIBLES
 BALANCE OF TRADE

The balance of trade is the difference between the

monetary value of exports and imports in an economy
over a certain period of time
The Balance of Trade is identical to the difference between
a country's output and its domestic demand 
 A positive balance of trade is known as a trade surplus
Export earnings would be greater than the import
payments
A negative balance of trade is known as a trade deficit
Import Payments would be greater than the Export
earnings
 DIFFERENCE BETWEEN
• BALANCE OF TRADE=Trade in Goods &Trade in
Services
• Equilibrium in Balance of Trade -
Export Earnings-Import Payments=R=P=O
• Disequilibrium in Balance of Trade
• R>P-Surplus -Favorable
• R<P– Deficit-Unfavorable
• BALANCE OF PAYMENTS - Is a wide concept which
includes Current Account& Capital Account
 B.CAPITAL ACCOUNT
1.FOREIGN INVESTMENT(Net)
 In India (Direct, Portfolio &Others) -Net
Abroad -Net
2. LOANS (By India ,To India) -Net
External Assistance -Net
Commercial Borrowings (Med. & Long Term) -Net
Short Term Borrowings -Net
3.BANKING CAPITAL -Net
Commercial Banks(Assets &Liabilities of NRIs) -Net
Others
4.RUPEEE DEBT SERVICE
5.OTHER CAPITAL (Sale of Assets to foreigners and Purchase
of assets from foreigners )
Total Capital Account(1 to 5)
C.ERRORS &OMISSIONS
D.OVERALL BALANCE (A=B=C)
E.MONETARY MOVEMENTS(IMF &Forex Reserves)
BALANCE OF PAYMENTS ALWAYS BALANCES
 KEY TRANSACTIONS IN BOP
Autonomous Transactions

Accommodating Transactions
CAUSES OF CURRENT ACCOUNT SURPLUSES AND
DEFICITS

Growing Population
Growing Domestic Demand
Inadequate Production
International Competitiveness
Exchange Rate
Trade Cycles
Trade Policy
Trade Restrictions
Industrial Requirements
Competition from Substitutes
Competition from Other Countries
Poor Marketing Including Advertisements
Poor Quality
Lack of Prompt Delivery
Frequent Change of the Governments
Lack of import substitution
Failure of Monsoons and Production
CAUSES OF DISEQUILIBRIUM

• Cyclical Disequilibrium-
Business Cycles-Price Rise in Prosperity &Price Decline
in Depression
• Secular /Long Term Disequilibrium-
Long term capital movements
• Technological Disequilibrium-
Inventions/innovations of new goods/new technologies
• Structural Disequilibrium-
Fall in demand for Indian handicrafts and jute products
in foreign countries
IMPLICATIONS OF DISEQUILIBRIUM IN BALANCE
OF TRADE
Favorable Balance Of Trade
• Import payments may not burdensome
• Accumulation of foreign exchange reserves
• Can buy more imports from the rest of the world
• Debt repayments may be more easier
• Can give landings to the rest of the world
• Increases the purchase of foreign assets
• Indicates the prosperity of the country
• Not a matter to the policy makers since it is a
comfortable position
Unfavorable Balance of Trade
Forced to borrow from the rest of the world
• Import payments may become more burdensome
• Foreign exchange reserves may be exhausted
• Can’t buy more imports from the rest of the world
• Debt repayments may be more burdensome
• Increases the sale of assets to foreigners
• Indicates the down turn of the country
• it should be a serious matter to the policy makers
since it is a unfavorable position
Methods to Correct Disequilibrium

• TRADE POLICY MEASURES-

Restrictions-Tariffs, Quotas, Licensing
• DEFLATION-
Reducing the domestic prices for the expansion of exports
and reducing imports.
It is dangerous & gives temporary effect
a. MONETARY POLICY Measures-Affecting Income &
prices
b. FISCAL POLICY MEASURES- Affecting income &prices
• DEVALUATION-
Lowering the value of domestic currency in terms of foreign
currency by an official edict .Temporary effect and
provokes other countries to follow the same step
• CAPITAL MOVEMENTS-
Borrowing or lending abroad
• EXCHANGE CONTROL-
Central bank may order the exporters to surrender the
foreign exchange reserves-rationed out among the
licensed importers.
 THANK YOU
Dr.L.Krishna Veni