SSE - Balance of Payment

8/7/2019 SSE - Balance of Payment

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Trade and Balance of Payment


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Components of the trade

Imports

-bulk imports: petroleum, crude & products,

bulk consumption goods, other bulk items.-non bulk imports: capital goods, mainly

export related items

Exports-agriculture and allied products, ores and

minerals, manufactured goods, mineral

fuels.


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Determinants of Exports

External factors

Rate of growth of the economies of importing

countries

Rate of growth of world trade

Rate of change in the price level in the importing

country

Internal Factors

Rate of growth of the Indian economy

Rate of change in the domestic price level

Exchange rate


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Determinants of Imports

Rate of growth of the Indian economy

Relative price of imports


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Balance of Trade &Balance of PaymentsBalance of Trade &Balance of Payments

BoT is a nations ratio of exports to imports.BoT is a nations ratio of exports to imports.

A favorable balance (trade surplus) of trade exists whenA favorable balance (trade surplus) of trade exists when

the value of a nations exports exceeds its imports.the value of a nations exports exceeds its imports.

A trade deficit is when imports exceed exportsA trade deficit is when imports exceed exports

BoPBoP

is the difference between money coming into a countryis the difference between money coming into a country

(from exports) and money leaving the country (for(from exports) and money leaving the country (for

imports) plus money flows from other factors such asimports) plus money flows from other factors such as

tourism, foreign aid, military expenditures, and foreigntourism, foreign aid, military expenditures, and foreign

investment.investment.

Balance of payments deficit or balance of paymentsBalance of payments deficit or balance of payments

surplussurplus


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Definition

The Balance Of Payments of a country is a systematicrecord of all economic transactions between the

residents of a country and the rest of the world. It

presents a classified record of all receipts on account of

goods exported, services rendered and capital received

by residents and payments made by them on account

of goods imported and services received from the capital

transferred to non-residents or foreigners. Reserve

Bank of India (RBI)

It is a statement of a country, which depicts thetransaction of that country with rest of the world during a

specified period of time..

A record of the value of all transactions between

residents of a country with outsiders..


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BOP Surplus and Deficit

In terms of the supply and demand of a nations

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 nations currency.

A balance of payments deficit if quantitysupplied of a currency exceeds quantity

demanded, putting downward pressure on the

value of the nations currency.


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Purpose of BoP

1. Measures all financial and economic transactions overa specified period of time.

2. Double-entry bookkeeping

a. Currency inflows = credits

earn foreign exchange

b. Currency outflows = debits

expend foreign exchange

3.Three Major Accounts:

a. Current

b. Capital

c. Official Reserves


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Importance of BoP

TheB

oP is an important indicator of pressure ona countrys foreign exchange rate .

The BoP helps to forecast a countrys market

potential, especially in the short run.

Changes in a countrys BoP may signal theimposition or removal of controls over payment

of dividends and interest, license fees, royaltyfees, or other cash disbursements to foreignfirms or investors.


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Components of BoP

Current account

Capital account

Financial account

Net errors and omissions account

Reserves and related items: official reserve

account


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Current account

Net export/import of goods (trade balance)

Net export/import of services

Net income (investment income from direct and

portfolio investment plus employeecompensation)

Net transfers (sums sent home by migrants andpermanent workers aboard, gifts, grants andpensions)

It includes :

- Invisibles (non-merchandise trade)

- Merchandise trade

- Non monetary sale or purchase of gold


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Merchandise or Trade balance: (BoT)GOODS

- Manufactured goods- Semi-finished goods and components- Energy products- Raw Materials- Consumer goods(i) Durable goods

(ii) Non-durable goods

- Capital goods (e.g. new plant and equipment)

SERVICES

- Banking, insurance , legal and consultancy services- Other financial services including foreign exchange and derivatives trading- Tourism industry- Transport and shipping- Education and health services- Services associated with research and development- Cultural arts

UNILATERAL TRANSFERS- Gifts- government transfers to foreigners(E.g., Foreign aid or wheat fromstockpiles)

- Private remittances of wages earned abroad

- interest payments, profits and dividends from external assets locatedoutside the country.


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Capital account

Capital transfers related to the purchase and sale offixed assets such as real estate

It comprises long term and short-term inflow and out flowof funds under the capital account receipts andpayments

Foreign equity investment in India-Direct investment: directly investing in India

- Through port-folio: purchase of Indian companies stock throughforeign institutional investors or subscriptions by non-residentinvestors to GDR and ADR issues by Indian companies.

Loan

- Concessional loans received by the government or public sectorbodies.-Long and medium term borrowings from the commercial capitalmarket in the form of loans, bonds

- Short-term credit

Other Investment

- transactions in currency, bank deposits, trade credits, etc


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- Net foreign direct investment- Net portfolio investment

- Other financial items

Net errors and omissions account- Missing data such as illegal transfers

Reserves and related items: official reserveaccount

- Changes in official monetary reserves including gold,foreign exchange, and IMF position.

Financial account


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Countries with which India trade

OECD

(1)European union

-France

-Belgium

-Germany

-UK

-Italy-Netherlands

(2) North America

-Canada

-USA

(3) Other OECD

-Australia

-Japan

-Switzerland

OPEC

- Iran

- Iraq

- Indonesia

- Saudi Arabia

- UAE

Eastern Europe- Russia

Developing countries

- China

- Hong-Kong

- South Korea

- Malaysia

- Singapore

- Thailand

- SAARC

- Africa

- others

Africa

-Benin

-Egypt

-Kenya

-South Africa

-Sudan

-Tanzania

-Zambia-USA

LAC


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CountryCountry StrengthsStrengths

United StatesUnited States Technology,Technology,R & D SpendingR & D Spending

FinlandFinland Univ. Enrollment, Efficient LegalUniv. Enrollment, Efficient LegalSystem, Business EthicsSystem, Business Ethics

TaiwanTaiwanCellCell--phone Ownership,phone Ownership,

Tech. Innovation,Tech. Innovation,

Local Firms CompetitivenessLocal Firms Competitiveness

SingaporeSingapore Savings Rate, Math/ScienceSavings Rate, Math/ScienceEducation, Political TrustEducation, Political Trust

SwedenSweden H.S. Enrollment, Press Freedom,H.S. Enrollment, Press Freedom,Phone AccessPhone Access

Global CompetitivenessGlobal Competitiveness


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References

http://indiabudget.nic.in/

http://www.eximbankindia.com/anr0910.pd

f http://rbi.org.in/scripts/PublicationsView.as

px?id=12304

http://gcr.weforum.org/gcr201

0/

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SSE - Balance of Payment