TOPIC:

Under the guidance of :-

PRESENTORS
SMRUTI
MODAK
(110)
JAY PATIL
(113)
KOMAL
SAWANT
(119)
KRISHNA
TIWARI
(121)
INTRODUCTION
DEFINITION
STRUCTURE OF BALANCE OF PAYMENT
BALANCE OF TRADE
DIFFERENCE BETWEEN BALANCE OF PAYMENT &
BALANCE OF TRADE
BALANCE OF PAYMENT ALWAYS BALANCES
DISEQUILLIBRIUM IN THE BALANCE OF PAYMENT
TYPES OF DISEQUILLIBRIUM
CAUSES OF DISEQUILIBEIUM
MEASURES TO CORRECT DISEQUILLIBRIUM
CONCLUSION

Balance of Payment is an account of the international
transactions of a country, and shows how the country
is faring in trade, attracting capital from abroad, and
the effect of that on its foreign exchange reserves.
The Balance of Payment data is useful in policy
formulation for the sector.
To study the strength and weakness of a country in
the field of international trade.
Internal study helps in knowing the Balance of
Payments position of the country.
A record of all transactions made between one
particular country and all other countries during
a specified period of time.
BOP compares the dollar difference of the amount of
exports and imports, including all financial exports and
imports.
A negative balance of payments means that more
money is flowing out of the country than coming in,
and vice versa.
Structure
of Balance
of
Payment
CURRENT
ACCOUNT
CAPITAL
ACCOUNT
CHANGE
IN FOREX
RESERVES
The current account is used to mark the inflow and
outflow of goods and services into a country.
Earnings on investments, both public and private, are
also put into the current account.
Within the current account are credits and debits on
the trade of merchandise, which includes goods such
as raw materials and manufactured goods that are
bought, sold or given away
India has always run a current account deficit which
means that it has always imported more than it has
exported.
Capital account can be thought of as the investments part
of the international transactions.
Capital account is further broken out into equity and debt
investment and the FII money and FDI money is part of the
equity investments.
While the external commercial borrowings, money
deposited in banks by NRIs and trade credits are debt
investments.
Indias current account deficit was being financed by a
capital account surplus, which meant that foreigners were
buying more assets in India or lending more capital to
India.
The difference between the current account and the
capital account is reflected in the change in the forex
reserves.
For example, in 2010-11, Indias current account deficit
was $45.9 billion but the capital account surplus was
$62.0 billion and this resulted in increase in foreign
exchange reserves of $13.1 billion.
Indias forex reserves had dwindled to lows of $5.1
billion in 1991 and as a result India had to borrow from
the IMF by pledging its entire stock of gold.
Of
trade..
The difference between the value of goods and services
exported out of a country and the value of goods and
services imported into the country.
The balance of trade is the official term for net exports that
makes up the balance of payments.
The balance of trade can be a "favorable" surplus (exports
exceed imports) or an "unfavorable" deficit (imports exceed
exports).
If a country has a balance of trade deficit, it imports more
than it exports, and if it has a balance of trade surplus, it
exports more than it imports.
Balance of
payment
Balance of
trade
BALANCE OF PAYMENT BALANCE OF TRADE
DIFFERENCE BETWEEN
Balance of payment is flow of
cash between domestic country
and all other foreign countries.
It includes import and export of
goods and services and also
financial capital transfer.
BOP = Current Account +
Capital Account + or -
Balancing item ( Errors and
omissions)
Main factors which affect BOP:
a) Conditions of foreign
lenders.
b) Economic policy of Govt.
c) all the factors of BOT
Balance of trade may be
defined as difference between
export and import of goods and
services.
BOT = Net Earning on
Export - Net payment for
imports.
Main factors which affect BOT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods
manufactured at home
INDIAN FOREIGN TRADE
SUMMARY
Year Exports Imports Trade Balance
2000-01 2,03,571 2,30,873 -27,302
2001-02 209018 245200 -36182
2002-03 255137 297206 -42069
2003-04 293367 359108 -65741
2004-05 375340 501065 -125725
2005-06 456418 660409 -203991
2006-07 571779 840506 -268737
2007-08 655864 1012312 -356448
2008-09 840755 1374436 -533680
2009-10 845534 1363763 -518202
2010-11 751633 1126513 -374880
BALANCE OF PAYMENT
ALWAYS BALANCES
In the accounting sense, the balance of payments of a
country is always in equilibrium.
The statement of balance of payments is prepared in
terms of credits and debits based on the system of
double-entry book-keeping.
In the double-entry system, each transaction gives rise
to two equal entries: a credit entry (i.e., a receipt) and a
debit entry (i.e., payment). Thus the sum of all credits
equals the sum of all debits.
The sum of all international receipts (credit items)
always equals the sum all international payments
(debit items).

Disequilibrium in
Balance
of Payment
DISEQUILIBRIUM IN
BALANCE OF PAYMENT
Disequilibrium refers to the imbalance in the balance
of payment in the form of surplus or deficits.
Most countries experience deficit in their trade
accounts, this is corrected through a surplus in
services.
The current account is the most important part of the
balance of payments. Very few countries enjoy a
surplus on this account.
The deficit on this account requires to be covered by a
surplus on capital account.


TYPES OF
DISEQUILIBRIUM
LONG RUN
SHORT RUN
CYCLICAL
STRUCTURAL
LONG RUN DISEQUILIBRIUM
Disequilibrium that prevails continuously for a long period of time
is known as long-run disequilibrium.
The IMF refers to it as fundamental disequilibrium.
The following are the main causes for long-run disequilibrium.
Excess imports for planned economic development.
Excess of domestic investment over domestic savings
Compulsion.
Import of essential goods due to continuous increase in
population Decline in demand for exports due to changes in
tastes, habits, income, technology, etc.
Increase in the price of imports.
SHORT RUN DISEQUILIBRIUM
Short-run Disequilibrium prevails for a year or for few years.
These deficits occur due to sudden increase in demand for
foreign goods and services
An increase in imports or decline in exports may arise due
to domestic problems like failure of monsoon, natural
calamities or political disturbances.
These disturbances cause disequilibrium that can be
corrected through short-term borrowing or other
adjustments in the capital account.

CYCLICAL DISEQUILIBRIUM
All economic activities are subject to business cycles
which have four phases: prosperity/boom, recession,
depression and recovery.
These cycles have their impact on all the nations of
the world. During the prosperity period, imports
increase.
During recession or depression, exports may
increase and imports are decreased.
Thus, disequilibrium is the result of the effects of
business cycles at home as well as other countries.


STRUCTURAL DISEQUILIBRIUM
It arises due to structural changes in the economy affecting
demand and supply relations in commodity and factor markets.
Export may decline due to changes in taste, fashion, habits or
income. Similarly, demand for a raw material may change due
to technological changes.
Factor markets may also undergo structural changes that affect
the commodity prices which in turn affect the exports.
All these changes may cause disequilibrium in balance of
payments of various economics.


CAUSES OF DISEQUILIBRIUM
Disequilibrium in the balance of payment occurs due to
imbalance between receipts and payments for exports and
imports.
Deficit in balance of payment is the result of excess of imports
over exports.
Thus, the three main cause of disequilibrium (deficit) are:
1) Increase in imports.
2) Decline in exports.
3) Other causes.


Continued
Reasons for increase in imports can be as follows:
a) Import of essential goods and services.
b) Population growth.
c) Increase in development programs.
d) Reduction in import duties.
e) Increase in income levels.
f) Inflation in domestic market.

The following are the reasons for decline in exports:
a) Appreciation in domestic currency.
b) Increase in population.
c) Inflation in domestic market.
d) Technological developments in importing countries.
e) Perfect trade policy of importing country.
f) Natural calamities.
MEASURES TO CORRECT
DISEQUILIBRIUM
DEVALUATION
DEPRECIATION
DEFLATION
EXCHANGE CONTROL
DEVALUATION
Devaluation refers to an official announcement of the
monetary authority through which the exchange rate
is changed.
When an economy faces the problem of foreign exchange, the
government tries to encourage exports and reduce imports.
This can be done through devaluation of the domestic
currency i.e. the government makes deliberate efforts to
reduce the value of home currency vise versa foreign
currency.
This will make exports cheaper and import costlier.
Deficit in balance of payments is expected to be corrected due
to increased exports and reduced imports.

DEPRECIATION
Deprecation means a fall in the rate of exchange of one
currency (home currency) in terms of another (foreign
currency).
A currency will depreciate when its supply in the foreign
exchange market is large in relation to its demand.
In other words, a currency is said to depreciate if its value falls
in terms of foreign currencies, i.e., if more domestic currency is
required to buy a unit of foreign currency.
Thus, depreciation helps a country to achieve a favorable
balance of payments by checking imports and stimulating
exports.
EXCHANGE CONTROL
Exchange control is the most widely used method for
correcting disequilibrium in the balance of payments.
Exchange control refers to the control over the use of foreign
exchange by the central bank.
Under this method, all the exporters are directed by the central
bank to surrender their foreign exchange earnings.
Foreign exchange is rationed among the licensed importers.
Only essential imports are permitted.
Exchange control is the most direct method of restricting a
country's imports.
DEFLATION
Deflation is a deliberate attempt by the monetary authorities of
the country to bring down the general price level.
The general price level is brought down by reducing money
supply with the help of both quantitative and qualitative
measures of control credit.
Lower prices would help increase the demand for exports and
decrease the demand of imports.
Deflation as a monetary measure to correct disequilibrium is
not free from limitation.
It will be successful only in the case of a regime of fixed
exchange rates.