BALANCE OF PAYMENT

VISWAKEERTHI R.S

BALANCE OF PAYMENT The balance of international payments, referred to

as the balance of payments(BOP) BOP presents a summary picture of a nation’s

economic transactions with the rest of the world during a specific period of time

DIFFERENCE BETWEEN BALANCE OF TRADE AND BALANCE OF PAYMENT

BOT- It shows only the goods trade. It does not cover services rendered by banking, insurance, payment of interest, dividend or expenditure by tourists.

BOP- It takes into account of visible and invisible items.

COMPONENTS OF BALANCE OF PAYMENT Current Account Capital Account Unilateral Payment Account Official Reserves Assets Account

CURRENT ACCOUNT It consists of two major items a)Merchandise exports and imports b)Invisible exports and imports

CAPITAL ACCOUNTCapital outflow represents debit and inflow

represents credit

UNILATERAL TRANSFERS ACCOUNT It includes gifts, private remittances, disaster

relief. Payments received from abroad are credits and

those made abroad are debitsOFFICIAL RESERVE ACCOUNT It represent the holdings of foreign currencies,

gold reserves by the government or official agencies.

CURRENT ACCOUNT BALANCE

It refers to the net flows of goods and services, income, gifts between the home country and foreign countries.

Current account surplus- excess of exports over imports of goods, services, investment income

Current account deficit – excess of imports over exports.

BOP DISEQUILIBRIUM

BOP of a country is said to be equilibrium when the demand for foreign exchange is equivalent to the supply

When BOP shows surplus or deficit regarded as disequilibrium

FACTORS AFFECTING DISEQUILIBRIUM

Economic factors Development disequilibrium- large scale

development expenditures increases purchasing power, aggregate demand.

Cyclical disequilibrium- recession, depression, high inflation

Secular disequilibrium Structural disequilibrium

Political factors Political instability results in large capital

outflows and inadequacy of domestic investment and production

Sociological factors Changes in tastes, preferences and fashions

affect import and export

CORRECTION OF DISEQUILIBRIUM Automatic correction- The market forces of demand and supply allowed

to have free play disequilibrium will be corrected fixed exchange rate system, adjustment in the

variables-price, interest, income and capital flows. Deliberate measure Monetary measure- aggregate domestic demand,

domestic price level and the demand for export and import may be influenced by contraction or expansion of money supply.

Trade measures Exports can be encouraged by reducing export

duties, subsidises, encouraging export production and marketing by giving monetary, fiscal and incentive facilities.

Imports can be controlled by imposing high duties, restricting imports through quotas, licensing etc..,

Miscellaneous measures Foreign loan, FDI, development of tourism

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