Balance of

Payments
Compiled by-
Saurav gupta
Deepankar thakur
Priyanka sharma
Shakti chauhan
Tanvi thakur
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 What is Balance of payments?
• 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. – INVESTOPEDIA FINANCIAL DICTIONERY
 
• A comparison between the payments made by one country to other nations of the world and the revenue
it receives from them. If receipts exceed outgoings, the balance is positive. The capital account records
payments made in settlement of old debts or establishment of new ones; the current account shows
payments made on goods and services, including interest payments. The balance of trade is a similar
record, but registers only visible exports and imports. – OXFORD DICTIONERY

• A  balance of payments (BOP) sheet is an accounting record of all monetary transactions between a

country and the rest of the world.
 These transactions include payments for the country's exports and imports of goods, services, and 
financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific
period, usually a year, and is prepared in a single currency, typically the domestic currency for the country
concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are
recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries,
are recorded as negative or deficit items. - WIKIPEDIA

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 Purpose of balance of payments

• Provides data for economic analysis.

• Reveals changes in the composition &
magnitude of foreign trade.
• Provides information on future repercussion
of country’s past trade performances.
• Reveals a country’s strong & weak points in
foreign trade relations.

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 Difference
Balance of payment Balance of trade

• Records transactions related • Records transaction related

to both goods and services. to merchandise transactions
only.
• Records transaction of • Does not record transaction
capital nature only. of capital nature.
• Include balance of trade, • A part of current account of
balance of services, balance Balance of payments.
of unilateral transfers &
balance of capital
transactions.

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Balance of payments
●
● Foreign investment
●
● Banking capital (NRI deposit)
●
● Short term credit
●
● External commercial borrowings & financial account

●
● Balance of trade
●
● Income account such as interest and dividends
●
● Transfers payments

●
● Gold reserves
●
● foreign currencies
●
● Special drawing rights
●
● Reserve position in IMF
 Capital account

• The capital/financial account – records transactions that involve the

purchase and sale of assets. There are two main categories.
– Capital Account:-
The capital account is equal to capital transfers, and the sale of natural and
intangible assets to foreigners minus the capital transfers, and the purchase of
foreign natural and intangible assets

– Financial Account
• Direct Investment – 10% or more of the voting shares.
• Portfolio Investment – investment of less than 10%.
• Other Asset Investment – currency deposits and bank deposits, and other accounts
receivable and payable related to cross-border trade.
 

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 Current account
When a trade deficit or surplus is reported, this is usually the account that is being referred
to. It is an indication of the desirability of a country's products and services by the rest of the
world, and therefore, its competitiveness in the world marketplace. The current account is
composed of 4 sub-accounts:

• Merchandise trade consists of all raw materials and manufactured goods bought, sold, or given away. Until
mid-1993, this was the figure that was used when the balance of trade was reported in the media. Since
then, the merchandise trade account has been combined with a second sub-account, services, to
determine the total for the balance of trade. 

• Services include tourism, transportation, engineering, and business services, such as law, management
consulting, and accounting. Fees from patents and copyrights on new technology, software, books, and
movies also are recorded in the service category. Most outsourcing of labour is a debit to the services
account.

• Income receipts include income derived from ownership of assets, such as dividends on holdings of stock
and interest on securities. 

• Unilateral transfers represent one-way transfers of assets, such as worker remittances from abroad and
direct foreign aid. In the case of aid or gifts, a debit is assigned to the capital account of the donor nation.
The amount of goods and services imported compared to the amount exported is known as the balance of
trade. A trade surplus exists when exports exceeds imports over a measured period and a trade
deficit exists when imports exceeds exports.
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 Official settlement account
An account within the balance of payments accounts showing the change in a
country's official foreign exchange reserves. It is used to measure a balance of
payments deficit or surplus. 
It is a type of account used in balance of payments accounting to keep track of
central banks' reserve asset transactions with each other. The official settlement
account keeps track of transactions involving gold, foreign exchange reserves, bank
deposits and special drawing rights (SDRs). Essentially, this account keeps track of
transactions related to international assets.
Part of the U.S. balance of payments that is based on transactions in the United
States reserve and in U.S. dollar-backed foreign exchange reserves. also called
reserved transaction account.

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 equilibrium in BOP
Every international transaction involving different currencies results in a credit and a
debit in the BOP. Credits are transactions that increase the amount of money to domestic
residents from foreigners, and debits are transactions that increase the money paid to
foreigners. For instance, if someone in England buys a South Korean stereo, the purchase
is a debit to the British account and a credit to the South Korean account. If a Brazilian
company sends an interest payment on a loan to a bank in the United States, the
transaction represents a debit to the Brazilian BOP account and a credit to the United
States BOP account.
When capital receipts of a country & exports (visible & invisible) are equal to its capital
payments and imports (visible & invisible) then its balance of payments is in equilibrium.
Example, If we buy more imported Goods than exported goods then we need financial
flows (e.g. long term capital investment to finance the purchase of imports)

EBOP= RECEIPTS – PAYMENTS= 0

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 Disequilibrium in BOP
• If payments > receipts, BOP shows DEFICIT i.e. UNFAVOURABLE BOP
• If payments < receipts, BOP shows SURPLUS i.e. FAVOURABLE BOP
While the BOP has to balance overall, surpluses or deficits on its
individual elements can lead to imbalances between countries. In general
there is concern over deficits in the current account . Countries with
deficits in their current accounts will build up increasing debt and/or see
increased foreign ownership of their assets. The types of deficits that
typically raise concern are:
• A visible trade deficit where a nation is importing more physical goods
than it exports (even if this is balanced by the other components of the
current account.)
• An overall current account deficit.
• A basic deficit which is the current account plus foreign direct investment
(but excluding other elements of the capital account like short terms loans
and the reserve account.)
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 Causes of imbalance
• Increase in imports
• Growing demand for consumption goods
• Price disequilibrium
• Foreign competition
• Burden of interest payments
• Slow progress in exports
• Deficit in capital account

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 INDIA’S BOP POSITION
YEAR BOP ON CURRENT BOP ON CAPITAL TOTAL BOP
A/C A/C (CURRENT+CAPITAL)
1990-91 -17,366 +12,895 -4,471
2000-01 -11,431 +39,093 27,662
2002-03 19,987 62,029 82,016
2003-04 47,952 96,042 1,43,994
2004-05 -12,174 1,28,081 1,15,907
2005-06 -43,737 1,09,633 65,896
2006-07 -45,343 2,08,977 1,63,634
2007-08 -68,914 4,38,603 3,69,698

IN Rs. CRORES

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 Correcting disequilibrium
• Promotion of exports
• Increase in production
• Trade agreement
• Encouragement to foreign investment
• Attraction to foreign tourists
• Check on domestic prices
• Restriction on imports
• Import substitution
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 BIBLIOGRAPHY
• WIKIPEDIA
• STATISTICAL OUTLINE OF INDIA
• RBI BULLETIN; MARCH 2009
• ECONOMIC SURVEY REPORT 2007-08
• WIKI ANSWERS
• INDIAN BUSINESS AND ECONOMY by
T.R.JAIN
• FOREIGN TRADE by
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