This document presents information about balance of payments. It defines balance of payments as a statement that records all monetary transactions between residents of a country and the rest of the world. It has three components - the current account, capital account, and financial account. The current account records trade in goods and services, while the capital and financial accounts record international capital transactions and flows of funds through assets. Maintaining a balanced balance of payments is important for a country's monetary policy and economic stability.
2. z
z
WHAT IS BALANCE OF PAYMENT(BOP)
Balance Of Payment(BOP)
is a statement that records
all the monetary
transactions between
residents of a country and
the rest of the world during
any given period.
BOP includes all
the transactions
made by individuals,
corporate and helps in
monitoring the flow of funds
to develop the economy.
A BOP statement of a
country indicates whether
the country has a surplus or
a deficit of funds.
BOP is similar to the double-
entry accounting system.
All transactions will have
a debit entry and a
corresponding credit entry.
4. z
z
TYPES OF BALANCE OF PAYMENT
Favourable Balance Of Payment:
A favourable balance of
payment is a scenario where
the good and services
exported plus capital
transfers are in excess when
compared the amount of
good and services imported
and capital transfers abroad.
This indicates a positive
inflow of money to stimulate
local economic activity.
5. z
z
Unfavourable Balance Of Payment
An unfavourable balance
of payment is the result
of excessive goods and
service imported plus
capital transfers from
abroad over the goods
and service exported
plus the capital transfers
from abroad. When
imports are greater than
exports.
6. z
z
COMPONENTS OF BALANCE OF PAYMENT
CURRENT ACCOUNT :
The current
account records
and monitors the
inflows and
outflows of
funds from the
goods and
services trade .
Current account
s include
records of
funds receive
and spent on
activities like tou
rism, revenue
from
the service secto
r etc.
The revenue
generated from
stocks and
royalties from
patents and
copyrights are
also recorded
under the
current account.
7. z
z
The four major component of the current account are as follows:
Visible trade:
This is the net of export and imports of
goods(visible item).the balance of this visible
trade is known as the trade balance. There is
a trade deficit whwn import are higher than
exports and exports and a trade surplus when
exports are higher than imports.
Invisible trade:
This is the net of exports and imports of
services(invisible items). Transactions mainly
consist of shipping, IT, banking, and insurance
service.
8. z
z
Unilateral transfers to and from abroad:
These refer to payments that are not factor
payments – for example, gifts or donations sent
to the resident of a country by a non-resident
relative.
Income receipts and payments:
These include factor payments and receipts.
These are generally rent on property, interest on
capital, and profit on investments.
9. z
z
CAPITAL ACCOUNT :
Cash flows from international capital
transactions are recorded and
monitored by the country's capital
account.
Capital account transaction that take
place through the purchase or
disposal of non-produced assets.
Funds received from gift taxes and
debt forgiveness is also recorded in
the capital account.
10. z
z
• The three major components of the capital account:
Loans to and borrowings from abroad:
These consist of all loans and
borrowings given to or received from
abroad . It includes both private sector
loans as well as public sector loans.
Investments to/from abroad:
These are investments made by
nonresidents in shares in the home
country or investment in real estate
in any other country.
Changes in foreign exchange reseves:
Foreign exchange reserves are
maintained by the central bank to
control the exchange rate and
ultimately balance the BOP.
11. z
z
FINANCIAL ACCOUNT :
Under the financial account the flow of
funds from businesses, real estate, stocks,
gold and government-owned assets are
monitored.
Financial account also maintains the
records of assets owned by foreign
nationals in India, foreign investments and
assets owned by Indian nationals abroad.
12. z
z
Importance of the balance of payments in India:
BOP monitors the transaction of all the imports and
exports of goods and services for a given period.
It helps the government analyze a particular
industry's export growth potential and formulate
policies to sustain it.
The balance of payment also indicates the government
to detect the state of the economy, and plan
expansion. Monetary and fiscal policy are established
on the basic of balance of payment status of the
country.
14. z
z
Sources of supply of foreign exchange:
Foreign investment.
Loans from rest of the world.
Grants and donations from rest of the world.
Exports of goods and services is an important source of supply of
foreign exchange.
