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The balance of payments (BOP) is the method

countries use to monitor all international


monetary transactions at a specific period of
time. Usually, the BOP is calculated every quarter
and every calendar year. All trades conducted by
both the private and public sectors are accounted
for in the BOP in order to determine how much
money is going in and out of a country. If a
country has received money, this is known as a
credit, and if a country has paid or given money,
the transaction is counted as a debit.
Theoretically, the BOP should be zero, meaning
that assets (credits) and liabilities (debits) should
balance, but in practice this is rarely the case.
The Current Account,
The Capital Account
The Financial Account
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 .
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.
The capital account is where all international
capital transfers are recorded. This refers to
the acquisition or disposal of non-financial
assets (for example, a physical asset such as
land) and non-produced assets, which are
needed for production but have not been
produced, like a mine used for the extraction
of diamonds.
In the financial account, international
monetary flows related to investment in
business, real estate, bonds and stocks are
documented. Also included are government-
owned assets such as foreign reserves, gold,
special drawing rights (SDRs) held with the
International Monetary Fund (IMF), private
assets held abroad and direct foreign
investment. Assets owned by foreigners,
private and official, are also recorded in the
financial account.
The trade balance subtracts imports from
exports. Imports are any goods and services
that are made in a foreign country and
bought by a country's residents. You think of
imports as being shipped in from a foreign
country. But, even if it's purchased by
residents while traveling abroad, it's still an
import.
Exports are any goods or services sold by a
native resident or business to a foreign one.
It can be a pair of jeans you mail to a friend
or signage a corporate headquarters transfers
to its foreign office. If the foreigner pays for
it, then it's an export.
Balance Countries try to create trade policies that
encourage a trade surplus. They consider this to
be a favorable trade balance because it's like
making a profit as a country. They prefer to sell
more and receive more capital for the residents.
That translates into a higher standard of living.
The companies gain a competitive advantage in
expertise by producing all the exports. They hire
more workers, reducing unemployment and
generating even more income
For example, Hong Kong has a trade deficit. But
its imports are raw materials that it converts into
finished goods and exports out. .
Trade deficits are usually an unfavorable balance
of trade. That's because most countries with
trade deficits import more in consumer products
than they export in raw materials
. China and Japan have both become dependent
on exports to drive economic growth. They must
purchase significant amounts of U.S. Treasuries
to keep the dollar's value high and the value of
their currencies low. That's how they keep their
exports competitively priced, and maintain their
trade surplus
A Balance of Payment Account is a systematic
record of all economic transactions between
residents of a country and the rest of the world
carried out in a specific period of time.
Briefly put, Balance of Payment Account is a
summary of international transactions of a
country for a given period (i.e., financial year). It
records a countrys transactions with the rest of
the world involving inflow and outflow of foreign
exchange. In short BOP Account is a summary
statement of transactions in foreign exchange in
a year.
(i) It is a systematic record of all economic transactions
between residents of one country and rest of the world.
(ii) It includes all transactions in goods (visible items),
services (invisible) and assets (flow of capital) during a
period of time.
(iii) It is constructed on double entry system of accounting.
Thus, every international transaction will result in credit
entry and debit entry of equal size
(iv) All economic transactions that are carried out with the
rest of world are either credited or debited.
(v) In accounting sense total debit will always be equal to
total credits, i.e., balance of payments will always be in
equilibrium. But in economic sense, if receipts are larger
than payments, there is surplus in BOR Similarly, if
payments are larger than receipts, there is deficit in BOP
A hypothetical simplified example of a countrys Balance of Payment
Account is given in the following table. It has two sidescredits
(receipts) on the left side and debits (payments made) on the right
side.
Export and Import goods
Service rendered and received
Unilateral transfer
Capital reciepts and payments

Visible items refer to items relating to trading in
goods with other countries. For example export
and import of goods (like machinery, tea, etc.)
are called visible items because goods are visible
items and can be verified by Custom officials.
Invisible items refer to items relating to trading
of services with other countries and unilateral
transfers. Export and import of services are
called Invisible items because services are not
seen crossing the border. All types of services
like services of shipping, banking, tourism,
investment services and unilateral transfers are
invisible items.
Although net services receipts moderated marginally on a y-o-y basis largely due
to fall in export receipts in transport, insurance and pension services, there has
been some improvement over the preceding quarter.

Private transfer receipts, mainly representing remittances by Indians employed


overseas, amounted to US$ 16.5 billion, a marginal decline from their level in the
preceding as well as the corresponding quarter.

After a sharp pick up in Q1, net foreign direct investment moderated in Q2 of


2015-16.

There has been net outflow of portfolio investment to the tune of US$ 6.5 billion
as against net inflow of US$ 9.8 billion in Q2 of last year; outflow was more
evident in the equity segment.

Non-resident Indian (NRI) deposits, however, increased by 4.0 per cent in Q2 of


2015-16 over the level in Q2 of last year.

Foreign exchange reserves (on BoP basis) decreased by US$ 0.9 billion in Q2 of
2015-16.
Though the credit and debit are written
balanced in the balance of payment account,
it may not remain balanced always. Very
often, debit exceeds credit or the credit
exceeds debit causing an imbalance in the
balance of payment account. Such an
imbalance is called the disequilibrium.
Disequilibrium may take place either in the
form of deficit or in the form of surplus
POPULATION GROWTH
NATURAL FACTOR
DEMONSTRATION EFFECT
CYCLICAL FLUCTUATIONS
FLIGHT CAPITAL
BOP accounts will always balance when all types of
payments are included, imbalances are possible on
individual elements of the bop, such as the current
account, the capital account. Disequilibrium of
deficit arises when our receipts from the foreigners
fall below our payment to foreigners. it arises when
the effective demand for foreign exchange of the
country exceeds its supply at a given rate of
exchange. this is called an 'unfavourable balance'.
Solution to correct balance of payment disequilibrium
lies in earning more foreign exchange through
additional exports or reducing imports. quantitative
changes in exports and imports require policy
changes. such policy measures are in the form of
monetary, fiscal and non-monetary measures
THANK YOU

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