BALANCE OF PAYMENT (BOP)

Balance of Payment- account is a statement of double entry system of record of all economic transactions (involving foreign payments) between a countryand the rest of the world in a given period of time. Use of BOP: Records transactions relating to both goods andservices Records transaction ofcapital nature Includes BOT , Balance ofservices , Balance Of Unrequited Transfers and Balance Of Capital Transactions.

The purpose of BOP: Provides data for economic analysis Reveals changes in the composition &magnitude of foreign trade Provides indications of future percussions of countrys past tradeperformances Reveals the weak and strong points of acountrys foreign trade relations

Balance of Trade- Difference between value of exports and imports of visible items only.

Use of BOT Records only merchandise transactions Does not record transactionsof capital nature A part of current account of BOP

Current Account- All transactions relating to goods,services and unrequited transfers constitute current account. It also have f low of items pertaining to specificperiod of time. Structure of current account:

Capital Account- All transactions indicating changes in stock magnitudes concerning capital receipts and payments constitute capital account. It Relates to: Short term capital movement includes: Purchase of short term securities Speculative purchase of foreign currency Cash balances held by foreigners Net balance of current account Borrowing Capital repayment Sale of assets Change in stock of gold Change in reserve of foreign currency

Long term capital movement includes: Investments in shares, bonds, physical assets etc. Amortization of capital

Difference between Current Account and Capital Account: Current Account Indicates flow aspectof countrys nationaltransactions Relates to goods ,services and Capital Account Indicates changes instock magnitudes Relates to all transactions constituting debts and transfer of ownership.

unrequitedtransfers

Structure of BOP account: Debit Current A/c: Exports of goods(Visible items) Exports of services(Invisibles) Unrequited receipts(gifts ,remittances, indemnities,etc. form foreigners) Credit Current A/c: Imports of goods(Visible items) Imports of services(Invisibles) Unrequited gifts,remittance, toforeigners) Capital A/c: Capital receipts (Borrowingsfrom Capital A/c: Capital payments (lending to ,capital repayments to , orpurchase of assets fromforeigners, reduction in stockof gold and reserves of foreigncurrency etc.) Total receipts Total payments payments( indemnities etc.

abroad , capital repaymentsby , or sale of assets toforeigners, increase in stock ofgold and reserves of

foreigncurrency etc.)

Official Reserve Account consists of: Reserved government gold and foreign currency. Government reserves with Internatinal Monetary Fund (IMF). Reserved in Special Drawing Rights (SDR).

Basic calculation of BOP: 1. Merchandise trade balance= merchandise exports merchandise imports 2. Service balance = Services exports services imports 3. Balance in current account = merchadise trade balance + service balance + net income + current transfer. 4. Balance on capital account = capital account + financial account 5. Overall balance = balance in current account + balance in capital account + error and ommissions 6. Reserve assets = - (Overall balance) 7. Basic balance (based on old methods) = balance in current account + long-term capital account. Equilibrium in BOP. Total receipts equals total payments arising out of transfer of Goods and services Other transactions ;These transactions are classified as: Autonomous transactions Induced transactions or Accommodating capital flows

In the current account autonomous transactions are the export and import ofgoods and services. When export is not equal to import, shortrun capital movements such as international borrowing and lending take place, which arecalled induced or accommodating transactions.

In the capital account the export andimport of long term capital are autonomous transactions. The short term capital movements visualize gold movements and accommodating capital movements on account of autonomous transactions are induced transactions.

Disequilibrium in BOP. Total receipts and total payments inequality shows disequilibrium of balanceof payments account. Total receipt and payment arising from autonomous transactions determine the deficit or surplus in the balance of payments. If payments>receipts, BOP shows Deficit If payments<receipts, BOP shows Surplus

Kinds of BOP disequilibrium: Fundamental Disequilibrium Cyclical Disequilibrium Structural Disequilibrium

Causes of disequilibrium: Increase in imports Slow progress in exports Burden of interest payments International developments Deficit in capital account

Corrective Measures: Devaluation Export promotion Import restrictions Import substitution Government intervention Supply of credit Special treatment to NRIs Announcement of trade policies Foreign aid Improvements in production efficiency

BOP Adjustments : INDIRECT MEASURES Income measures Fiscal Policy Monetary Policy Price measures

DIRECT MEASURE Exchange control

MALAYSIA INDUSTRIAL PRODUCTION GROWS FASTER THAN EXPECTED

By Rupa Damodaran rupabanerji@nstp.com.my 2012/12/12

KUALA LUMPUR: The Industrial Production Index (IPI) grew by a surprising 5.8 per cent in October, faster than market expectations.

Economists said the latest industrial output data, which bettered the revised 5.0 per cent in September, indicates that the economy will be able to exceed five per cent growth this year.

The Statistics Department said yesterday the IPI rose due to rises in all of its indices manufacturing (5.8 per cent), mining (6.1 per cent) and electricity (4.4 per cent).

Compared to September, the IPI increased by 0.6 per cent (contributed by 3.8 per cent from mining, -0.8 per cent from manufacturing and -2.2 per cent from electricity).

According to the Statistics Department, the major sub-sectors that registered increases in the manufacturing output are non-metallic mineral products, basic metal and fabricated metal products (20.1 per cent), transport equipment and other manufactures (14. 3 per cent) and petroleum, chemical, rubber and plastic products (7.1 per cent).

The mining sector also recorded an increase in output, led by increases in crude oil index and natural gas index.

Dr Chua Hak Bin of Bank of America Merrill Lynch commented that industrial production was supported by domestic-oriented industries, as exports were weak and contracted in October (-3.2 per cent).

Strong industrial production suggests gross domestic product growth will likely exceed five per cent for the full year, he added.

Average GDP growth is about 5.3 per cent for the first nine months.

"We are forecasting growth to come in around 5.2 per cent in 2012, and to moderate to 4.7 per cent in 2013."

CIMB Investment Bank expects the IPI to expand by 3.5 to 4.5 per cent in 2013, compared with 3.0 to 3.5 per cent in 2012, with regional PMIs (Purchasing Managers' Index) and China's macro data showing improvement as well as recovery in exports.

Its director of economic research Lee Heng Guie expects the implementation of Economic Transformation Programme and 10th Malaysia Plan projects to buttress domestic-oriented industries, including the construction-related building materials sector.

"We expect the recovery in industrial production to stay on course, albeit at a gradual pace."

Persistent concerns surrounding the eurozone debt crisis coupled with issues shrouding the fiscal cliff in the United States have weighed on market sentiment, he added.

Domestic-oriented industries remain the pillar of support for the manufacturing sector as export-oriented industries continue to face external headwinds amid weak global demand.

Meanwhile the Statistics Department announced that the manufacturing sector in October 2012 posted a growth of 2.6 per cent to record RM52.9 billion in sales as compared to RM51.6 billion reported a year ago.

Month-on-month basis, the sales value also increased by 0.4 per cent as compared with the preceding month's RM52.7 billion. Mail webheads for site related feedback and questions. Write to the editor or contact sales for other kind of help. Copyright The New Straits Times Press (Malaysia) Berhad, Balai Berita 31, Jalan Riong, 59100 Kuala Lumpur, Malaysia.

National income is flow of goods and services in a nation for a certain period of time (usually for a year). Gross Domestic Product (GDP) is total market value of all final goods and services produced by factors of production in a country over a given period of time. GDP can be measured at market price and at factor cost. Market price Current price in market through the forces of demand and supply. Factor cost Real prices earned by producers or sellers. GDP at factor cost = GDP at market price indirect taxes + subsidies

Public debt is which a government owes to its subjects ot to the nationals of other countries. Sources of public debt: Internal sources borrowing from citizens, financial institutions, loans from commercial bamks External sources international money market, currency loans from foreign government, loans from international financial institutions.

Fiscal policy the use of government taxation and expenditure to influence the country;s spending, employment and price level. Types of fiscal policy: Expansionary Fiscal Policy adopted to overcome unemployment or recession problem by increase public spending. Increase govenrment expenditure, decrease taxes. Contractionary Fiscal Policy adopted to overcome inflationary problem. Create budget surplus to reduce aggregate spending. Decrease government expenditure, increase taxes.