BALANCE OF PAYMENTS - ECONOMICS

1. ECONOMICS FOR MANAGERS
BALANCE OF
PAYMENTS
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ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

2. DEFINITION
“THE BALANCE OF PAYMENTS OF A COUNTRY
IS A SYSTEMATIC RECORD OF ALL ECONOMIC
TRANSACTIONS BETWEEN RESIDENTS OF A
COUNTRY AND 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
RBI
ST.ALOYSIUS FOREIGNERS & RESIDENTS OR INSTITUTE OF MANAGEMENT“.TECHNOLOGY (AIMIT)
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3. MEANING (IN
SIMPLE)
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IN A NUTSHELL THE BOP OF ANY
COUNTRY IS “A SYSTEMATIC
RECORD OF ALL ECONOMIC
TRANSACTIONS BETWEEN THE
RESIDENTS
OF
A
GIVEN
COUNTRY (SAY INDIA) AND OF
THE RESIDENTS OF REST OF THE
WORLD IN AN ACCOUNTING
PERIOD”
ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

4. MEANING (IN
SIMPLE)
THE BOP STATEMENTS RECORDS
BOTH PAYMENTS AND RECEIPTS
BY A COUNTRY.
IT IS ALSO A BALANCE SHEET OF
RECEIPTS & PAYMENTS OF A
COUNTRY
DURING
AN
ACCOUNTING YEAR.
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ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

5. COMPONENTS OF BALANCE OF
PAYMENTS
UNILATERAL
TRANSFERS
A/C
LONG
TERM
CAPITAL
A/C
SHORT
TERM
CAPITAL
A/C
SERVICE
S A/C
GOODS
A/C
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BALANCE
OF
PAYMENTS
INTERNATIONA
L
LIQUIDITY
A/C
ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

6. GOODS ACCOUNT
 ITEMS OF FOREIGN EXCHANGE
EARNINGS
SPENDINGS/PAYMENTS
AND
 INCLUDES
VALUE
OF
MERCHANDISE EXPORTS AND
THE VALUE OF MERCHANDISE
IMPORTS
ST.ALOYSIUS INSTITUTE OF MANAGEMENT
 THESE ARE VISIBLE & TECHNOLOGY (AIMIT)
ITEMS
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7. GOODS ACCOUNT
IF


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RECEIPTS OF EXPORTS > PAYMENTS FOR
IMPORTS => POSITIVE
RECEIPTS OF EXPORTS<PAYMENTS FOR
IMPORTS => NEGATIVE
ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

8. SERVICES ACCOUNT
 RECORDS
ALL
THE
SERVICES
EXPORTED & IMPORTED BY COUNTRY
IN A YEAR
 SERVICES
ARE
INTANGIBLE
(INVISIBLE) ITEMS IN BOP
 WHY INVISIBLE-??? BECAUSE UNLIKE
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GOODS, THEY ARE NOT RECORDED
IN THE PORT OF ENTRY & TECHNOLOGY (AIMIT)
ST.ALOYSIUS INSTITUTE OF MANAGEMENT

9. SERVICES ACCOUNT
SERVICE TRANSACTIONS INCLUDE –
(a)TRANSPORTATION,
BANKING,
INSURANCE RECEIPTS & PAYMENTS
FROM & TO FOREIGN COUNTRIES
(b) TOURISM, TRAVEL SERVICES &
TOURIST PURCHASES OF GOODS &
SERVICES RECEIVED FROM FOREIGN
TOURISTS TO INDIA AND INDIAN
TOURISTS GONE ABROAD
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ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

10. SERVICES ACCOUNT
SERVICE TRANSACTIONS INCLUDE –
(c) EXPENSES OF STUDENTS STUDYING
ABROAD
AND
RECEIPTS
FROM
FOREIGN STUDENTS STUDYING IN
HOME COUNTRY
(d) EXPENSES OF DIPLOMATIC &
MILITARY PERSONNEL STATIONED
ABROAD
AND
FROM
SIMILAR
PERSONNEL FROM OVERSEAS WHO
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ARE ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
STATIONED IN THE HOME

11. SERVICES ACCOUNT
SERVICE TRANSACTIONS INCLUDE –
(e) INTERESTS, PROFITS, DIVIDENS AND
ROYALITIES
RECEIVED
FROM
FOREIGN COUNTRIES PAID OUT TO
FOREIGN COUNTRIES
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ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

12. UNILATERAL TRANSFER ACCOUNT
• THIS ACCOUNT INCLUDES ALL GIFTS,
GRANTS AND REPARATION RECEIPTS
AND
PAYMENTS
TO
FOREIGN
COUNTRIES
• UNILATERAL TRANSFER CONSIST OF 2
TYPES OF TRANSFERS(a) Government Transfers,
(b) Private Transfers
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ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

13. UNILATERAL TRANSFER ACCOUNT
(a)Government Transfers – Foreign aids
receipts
Eg:- US FOREIGN AID to INDIA
(b) Private Transfers – Funds received
from or remitted to foreign countries on
person-to-person basis
Eg:- A Indian settled in Australia remitting
$100 a month to his aged parents in
IndiaST.ALOYSIUS unilateral (pvt)TECHNOLOGY (AIMIT)inflow
is a INSTITUTE OF MANAGEMENT & transfer
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item in the Indian BOP

14. LONG TERM CAPITAL ACCOUNT
• INCLUDES THE AMOUNT OF CAPITAL
THAT HAS MOVED INTO OR OUT OF
THE COUNTRY IN A YEAR.
• LONG-TERM
CAPITAL
ACCOUNT
INCLUDES
THE
FOLLOWING
CATEGORIES:(a) Private Direct Investment
(b) Private Portfolio Investment
(C)Government OF Loans & TECHNOLOGY (AIMIT)
to
foreign
ST.ALOYSIUS INSTITUTE
MANAGEMENT
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governments

15. LONG TERM CAPITAL ACCOUNT
(a)Private Direct Investment – Investments
done by Indian (persons & firms) in
foreign countries and vise versa
b) Private
Portfolio
Investment
–
Investments done by Indian citizens and
firms in foreign securities or stocks or
bonds or shares and vise versa
c) Govt Loans to foreign investments
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ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

16. SHORT TERM CAPITAL ACCOUNT
•
•
•
•
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BANK DEPOSITS & OTHER SHORT TERM
PAYMENTS AND CREDIT ARRANGMENTS
FALL INTO THIS CATEGORY.
ITEMS WHICH FALL DUE ON DEMAND OR IN
LESS THAN 1 YEAR
ERRORS & OMMISSIONS INCLUDED IN
SHORT
TERM
CAPITAL
A/C
OR
UNRECORDED
TRANSACTIONS
AS
A
SEPARATE BOP A/C.
THESE ERRORS INCLUDE (a) Statistical &
recording errors (b) Smuggling (C) Illegal &
secret capital movements (d) Imperfect
ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
estimation procedures

17. INTERNATIONAL LIQUIDITY
ACCOUNT
•
RECORDS NET
RESERVES.
•
LISTS
INTERNATIONAL
ACCEPTABLE
MEANS OF SETTLING INTERNATIONAL
OBLIGATIONS.
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CHANGES
IN
FOREIGN
ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

18. UNDERSTANDING INTERNATIONAL
LIQUIDITY ACCOUNT
SURPLUS CASE:- ($ MILLION)
CREDIT
DEBIT
(RECEIPTS)
(PAYMENTS)
1
1500
800
2
SERVICES ACCOUNT
500
1400
3
UNILATERAL TRANSFERS ACCOUNTS
100
120
4
LONG TERM CAPITAL ACCOUNT
900
400
5
SHORT TERM CAPITAL ACCOUNT
500
630
6
INTERNATIONAL LIQUIDITY ACCOUNT
7
18
GOODS ACCOUNT
BALANCE OF PAYMENTS
150
3500
ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
3500

19. UNDERSTANDING INTERNATIONAL
LIQUIDITY ACCOUNT
SURPLUS CASE:- ($ MILLION)
THE LOGIC OF $150 MILLION AS
DEBIT/PAYMENT IS
A) PURCHASE OF IMPORT OF GOLD WORTH
$150 MILLION; OR
B) NET ADDITION TO ACCUMULATION OF
FOREIGN RESERVES OF $150 MILLION; OR
C) CAPITAL LENDING IN THE SUM OF $150
MILLION TO OTHER COUNTRIES ON SHORT
TERM OR LONG TERM BASIS
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DEBIT ENTRY = SURPLUS
ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

20. UNDERSTANDING INTERNATIONAL
LIQUIDITY ACCOUNT
DEFICIT CASE:- ($ MILLION)
CREDIT
DEBIT
(RECEIPTS)
(PAYMENTS)
1
800
1500
2
SERVICES ACCOUNT
1400
500
3
UNILATERAL TRANSFERS ACCOUNTS
120
100
4
LONG TERM CAPITAL ACCOUNT
400
900
5
SHORT TERM CAPITAL ACCOUNT
630
500
6
INTERNATIONAL LIQUIDITY ACCOUNT
150
7
20
GOODS ACCOUNT
BALANCE OF PAYMENTS
3500
3500
ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)

21. UNDERSTANDING INTERNATIONAL LIQUIDITY
ACCOUNT
DEFICIT CASE:- ($ MILLION)
DEFICIT IS FINANCED BY
A) SELLING OR EXPORTING GOLD WORTH $150
MILLION; OR
B) DRAWING DOWN UPON THE PAST
ACCUMULATED FOREIGN RESERVES = $150
MILLION; OR
C) BORROWING CAPITAL IN THE SUM OF $150
MILLION ON SHORT TERM OR LONG TERM
BASIS FROM FRIENDLY COUNTRIES OR
INTERNATIONAL INSTITUTIONS LIKE IMF
ETC
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ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
CREDIT ENTRY = DEFICIT

22. BOP SCHEDULE - SAMPLE
MAJOR ACCOUNTS
CREDITS
DEBITS
Net Surplus (+)
(Receipts)
(Payments)
or Deficit (-)
GOODS A/C
200
180
20
SERVICES A/C
100
250
-150
300
430
-130
UNILATERAL TRANSFERS ACCOUNT
300
120
180
BALANCE OF PAYMENTS ON CURRENT A/C (I+II+III)
600
550
50
LONG TERM CAPITAL ACCOUNT
150
120
30
BASIC BALANCE (I + II + III + IV)
750
670
80
50
40
10
BALANCE OF PAYMENTS ON CAPITAL ACCOUNT (IV + V)
200
160
40
OVERALL BALANCE OF PAYMENTS (B+D)
800
710
90
BALANCE OF TRADE (I + II)
SHORT TERM CAPITAL ACCOUNT
90
INTERNATIONAL LIQUIDITY ACCOUNT
BALANCE OF PAYMENTS ACCOUNTING BALANCE
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800
800
ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)
0

23. THANK YOU
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ST.ALOYSIUS INSTITUTE OF MANAGEMENT & TECHNOLOGY (AIMIT)