Department of Technical Education

Name : M. Narasimham
Andhra
Designation Pradesh
: Senior lecturer in CCP
Institution : Govt polytechnic for women (M)
LB Nagar, hyd
Branch : commercial and computer
practice
Semester : VI
Sub.code & title : CCP-602: business Economics-II
Major topic : International trade
Sub topic : Balance of Payments
Duration : 50min
Teaching aids : PPT, Animations& Photographs

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Recap
 In the previous class , you have learnt the balance
of trade
 Balance of trade or net export is the different
between the monetary value of exports and
imports
 There are two types of balance of trade
i) positive balance of trade
ii) negative balance of trade
 there are several factors which influence balance
of trade CCP602.69 to 70 2
Objectives

On completion of this period you would be

able to:
 Explain the meaning of balance of payments

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Known to unknown

 Have you ever heard the word balance of

payments?
 What is Balance of Payments (BOP)

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 We have already studied that
International trade means:
 Import of goods and export of goods
by a country

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 For imports payments are to be made in foreign
currency
 For exports foreign currency is received

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 We now study balance of payments:
 Balance of payments is defined as:
 The study of receipts and payments of foreign
currency by a country for export and import of
goods etc.
 A balance of payment is a systematic record of
all international economic transactions of a
country during a given period usually a year

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Definition of balance of payments

 A systematic record of a nation’s

 Total payments to foreign countries, including
the price of imports and the outflow of the capital
and gold,
And
 The total receipts from abroad, including the
price of exports and the inflow of capital and
gold.

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 The Balance of Payments for a country is the
sum of the current account, the
capital account, the financial account and
the change in official reserves.

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What is the purpose of study of Balance
of Payments ?

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Purpose of balance of payments
 The purpose of balance of payments statement
is
 To inform government authorities of the
International position of the country
 To assist them in taking decisions on monetary-
fiscal policies as well as international trade and
payments policies

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 Contd.,

 It enables a country in knowing whether its foreign

exchange resources are becoming weaker or stronger

 It also helps in knowing how foreign trade and

transactions influence the national income of a country

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Meaning of terms in balance of
payments

 Let us understand the terms used in preparation of

balance of payments like debits, credits etc

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Debits, Credits, and International
Payments
 What is the meaning of a debit in a balance of
payments account? What is a credit?

 A debit records a transaction increasing assets or

reducing liabilities.

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Debits, Credits, and International
Payments

 A debit results from some kind of transaction

requiring an immediate out-payment.
 A debit arises from the purchase of goods, claims,
or reserve assets and represents an inflow of
value.

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Debits, Credits, and International
Payments
 A credit records a transaction reducing assets or
increasing liabilities.
 It results from some kind of transaction requiring
an immediate in-payment.
 A credit arises from the sale of goods, claims, or
reserve assets and represents an outflow of
value.

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Sources and Uses of Funds

 How does a country derive foreign currencies it

needs to conduct its international business?
 The sources of funds, the supply of foreign
exchange, are
 exports,
 investment income,
 Transfer payments required
 Long-term and short-term borrowing

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Sources and Uses of Funds
 Credit entries reflect the sources, debit entries
indicate the uses of foreign exchange.

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The balance of payments
accounts
 The components of the balance of payments:
Current account
Capital account
Official financing
National income determination and foreign
trade

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Current Account

Records transactions arising from trade in goods

and services
 The visible trade balance
 payments and receipts from the import/export
of tangible goods (cars, food, textiles,…)

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 The invisibles trade balance
 payments and receipts for financial services,
shipping and tourism, interest and dividends
payments on investments, etc.…

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The balance of payments on Capital
Account
 Records transactions related to international
movements in the ownership of financial
assets

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 The purchase of foreign investments brings assets
to the India (in exchange for money) and are
referred to as a capital outflow
 to purchase these foreign assets, payments have to
be made in foreign currencies
 debit (negative) entry in the Capital Account

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Official financing

 The balance for official financing shows the net

increase or decrease in a country’s holdings of
foreign currency reserves:
 A decrease in the official reserves is reported as
a credit item (+)

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 An increase is reported as a debit item (-)
 If the exchange rate is freely floating, then the
balance for official financing is zero

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Summary

 The balance of payments must always balance

 It records receipts and payments in foreign
currency

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Quiz-Short questions

1. A systematic record of a nation’s total

___________ and ____________ foreign
currency
Answer 1. Receipts and payments

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Quiz-Short questions
Balance of payments consists of :

(a) Current account

(b) Capital account
© Official financing

(d) All the above

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Frequently asked
questions

Short Questions: ( 4 marks)

1. Define the term Balance of payments
2. Explain in four lines the meaning of current
Account in BOP

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Frequently asked questions
 Essay questions (12 Marks)
 Explain in detail Balance of payments
 Assignment
 Prepare answer for the above question

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CCP602.69 to 70 31