The balance of payments document discusses key aspects of a country's balance of payments (BOP) account including: - The BOP uses double-entry bookkeeping and has debit and credit sides to record international transactions. It can be balanced, in surplus, or in deficit. - The BOP provides information to governments about international trade and capital flows so they can implement appropriate policies. - It is a systematic record of all economic transactions between residents of a country and foreign countries over a period, usually a year. These transactions include exports/imports of goods and services, as well as capital account flows.

1. Balance Of Payments

2. • Bop account uses double entry system.
• It has two sides Debit and credit.
• Debit side: Outflow of foreign exchange
• Credit side: Inflow of foreign exchange.

3. • Bop can be :
• Balanced BOP: Exports = Imports
• Surplus BOP: Exports > Imports
• Deficit BOP: Exports < Imports
• In accounting sense this account should be equal as trial balance is
equal so this should be equal but in economic sense there are all
three possibilities.

4. • The main purpose of keeping account of international transactions is
to provide information to the government and other relevant
agencies about the international position of trade and capital flows of
the country.
• It enables the government to evolve appropriate monetary, fiscal and
trade policies.

5. • The balance of payments of a country is a systematic record of all
economic transactions between the residents of a country and
residents of foreign countries during a given period of time.
• It is an accounting statement that provides a systematic record of all
the economic transactions between residents of a country and rest of
the world.
• It is a summary statement in which all economic transactions
between residents and rest of the world are recorded at a particular
period of time.

6. Residents of a country
• It includes individuals, firms and govt. agencies.
• Residents do not include diplomatic staff, foreign military personnel,
tourists, migratory workers and branches of foreign companies.

7. Economic Transactions
• Receipts
• Payments
• The transactions which involves transfer of titles or ownership of
goods, services, money and assets.

8. • Economic transactions relate to flow of economic goods, services and
assets. It involves receipts and payments. Some economic flows may
take place without any payments and are of the nature of transfer
payments.
• It is between residents of a country and residents of other countries.
• It is a flow concept. They refer to certain time period, usually a
calendar year.

9. It Includes
• Visible items: Goods
• Invisible items: Services
• Unilateral transfer: One way transfer. Goods, services, gifts,
remittances and foreign aids.
• Capital transfer: Capital receipts and expenditure (assets, long term
goods)

10. Components of BOP
• Bop account of a country has two sides
• Credit (receipts)
• Debit (payments)
• Payments made by a country’s residents to foreigners are are called
debits and those received from the foreigners are termed as credits.

11. Items in the BOP are generally categorized in
two groups
• Current Account
• Capital Account
• Reserves Account
• Errors and Omissions Account

12. Current account
• It records all international economic transactions relating to exports and import
of goods, services, unilateral transfers and international incomes.
• Export and import of
• visible items: goods or merchandise
• Invisible items: services (shipping, banking, insurance, tourism etc.)
• Unilateral transfers: gifts, foreign aid etc.
• International incomes: Wages and salaries, capital services (interest, dividend,
profits etc.)

13. Current Account Transactions
• Export and import of goods and merchandise.
• Invisible items
✔ Services
✔Unilateral transfers
✔Incomes

14. Capital Account Transactions
• It records all international economic transactions relating to change
in assets both financial and physical.
• When the residents of a country borrow from abroad, it is importing
capital.
• It will be entered as credit item.
• When the residents of a country invest abroad, it is exporting capital.
• It will be entered as debit item.

15. Forms of Capital Movements
• The govt. corporations or individuals of a country may take loans
from the govt., corporations or from international financial
institutions.
• Govt. corporations or individual residents may receive payments
from abroad as repayment for a loan that they might have lent
abroad.
• Foreigners might acquire assets (land, houses, plants, shares etc.) in
the country with whose balance of payments we are concerned.
• Changes in country’s stock of gold or reserve of foreign currency are
also included.

16. Capital Movement
• Direct Foreign Investment
• Investment undertaken in the firms belonging to other countries by
acquiring control over them.
• Foreign direct investment (FDI) is a category of cross-border investment in
which an investor resident in one economy establishes a lasting interest in
and a significant degree of influence over an enterprise resident in another
economy.

17. • Portfolio Investment
• Companies and residents of a country purchase shares of foreign
companies or buy bonds issued by foreign governments.
• Purchases of shares of domestic companies and government bonds
by people of other countries.

18. RBI
• Classification of items in Capital Account
• Foreign Investment
• Loans
• Banking Capital
• Rupee debt (service are debts to be paid in rupees to foreigners by
Indian residents. Some debts can be paid in rupees.)
• Other capital and monetary movements.

19. Categories of BOP
• Balance of Trade
• Balance of current account
• Balance of Capital Account
(Balance is the difference between the sum total of credit items and
the sum total of debit items i.e, net credit)

20. Balance of Trade
• Balance of exports and imports of visible goods in a given year.
• It is the difference between amount of exports and imports of visible
items.
• BOT = Export of Goods – Import of Goods

21. BOT can have 3 aspects
• Balanced BOT
• Import = Export (Debit = Credit)
• Surplus BOT
• Export > Import (Credit > Debit)
• Deficit BOP
• Export < Import ( Credit < Debit)

22. Balance of Current Account
• Visible and Invisible Items.
• The current account balance of payments is a record of a country's international
transactions with the rest of the world. The current account includes all the
transactions (other than those in financial items) that involve economic values
and occur between resident and non-resident entities.
• It is a measure of all payments made for currently produced goods and services
plus non-trade flow (flow of factor incomes and unilateral transfers) of funds
between a country and rest of the world.

23. • Balance of Current Accounts = Balance of trade + Balance of invisibles
+ Balance of Transfers
• It shows the flow aspect of a country’s international economic transactions.
• The items included in the current account respond quickly to change in the
exchange rate.

24. Balance of Capital Account
• It refers to the balance of capital transfers – borrowing and lending
from abroad and sales and purchase of assets,(export and import of
capital), gold and foreign exchange from other countries.
• Balance of Capital account is the difference between the inflow and
outflow of capital.
• Capital flows refer to the movement of money for the purpose of
investment, trade, or business operations. ... Individual investors
direct savings and investment capital into securities, such as stocks,
bonds, and mutual funds.

25. • There are two types of capital flows in the capital account.
• Autonomous Capital Flow
• Accommodating Capital Flow

26. Autonomous Capital Flows
• Ordinary Capital Flows.
• Takes place because of normal economic considerations or motives like
earning of profits, dividends, interest and other incomes from international
investments and lending.
• It occurs in the current and capital accounts for business or profit motive
independently of the BOP considerations.
• For example, if a foreign company is making investments in India with the
aim of earning profit, then such a transaction is independent of the country's
BOP situation.

27. Accommodating Capital Flows
• It is made specifically to bring the BOP in equilibrium.
• Accommodating transactions are compensating capital
transactions which are meant to correct the disequilibrium in
autonomous items of balance of payments.
• Autonomous transactions or capital flows are those which occur in
the current and capital accounts for business or profit motive
independently of the BOP considerations.
• Transfers of money, gold, or highly liquid assets that a central bank or
other monetary authority makes to stabilize a country's balance of
payments.
• The accommodating transactions are not made for purposes of profit,
but instead to help bring equilibrium to a country's currency.

28. Balance of Payments
• Balance of payments includes total debits and credits relating to all
the items on account

30. Causes of Adverse Balance of Payments
● Fall in foreign demand
● Inflationary pressure in the economy
● Developmental Expenditures
● Increase in cost structure of Export Industries
● Decrease in supply
● Appreciation in the exchange rate
● Increased debt Burden
● Demonstration effect
● Population pressure
● Political Factors

31. Measures to correct Disequilibrium in the Balance
of Payments
•Monetary Measures for Correcting the BoP
Depreciation
Exchange depreciation means decline in the rate of exchange of domestic
currency in terms of foreign currency. This device implies that a country
has adopted a flexible exchange rate policy.
Exchange depreciation will stimulate exports and reduce imports because
exports will become cheaper and imports costlier. Hence, a favourable
balance of payments would emerge to pay off the deficit.

32. Devaluation
Devaluation refers to deliberate attempt made by monetary authorities to bring
down the value of home currency against foreign currency. While depreciation
is a spontaneous fall due to interactions of market forces, devaluation is official
act enforced by the monetary authority. Generally the international monetary
fund advocates the policy of devaluation as a corrective measure of
disequilibrium for the countries facing adverse balance of payment position.
When devaluation is effected, the value of home currency goes down against
foreign currency
Generally devaluation is resorted to where there is serious adverse balance of
payment problem.

33. Import Control
Non-Monetary Measures for Correcting the
BoP
Tariffs
Tariffs are duties (taxes) imposed on imports. When tariffs are imposed, the
prices of imports would increase to the extent of tariff. The increased prices
will reduced the demand for imported goods and at the same time induce
domestic producers to produce more of import substitutes. Non-essential
imports can be drastically reduced by imposing a very high rate of tariff.

34. Quotas
Under the quota system, the government may fix and permit the maximum
quantity or value of a commodity to be imported during a given period. By
restricting imports through the quota system, the deficit is reduced and the
balance of payments position is improved.
Types of Quotas :-
1. The tariff or custom quota
2. The unilateral quota
3. The bilateral quota
4. The mixing quota
5. Import licensing

35. Export Promotion
The government can adopt export promotion measures to correct
disequilibrium in the balance of payments. This includes substitutes, tax
concessions to exporters, marketing facilities, credit and incentives to
exporters, etc.
The government may also help to promote export through exhibition, trade
fairs; conducting marketing research & by providing the required
administrative and diplomatic help to tap the potential markets.

36. 1. It may reduce export duties so as to encourage exports.
2. Cash assistance and subsidies can be given to exporters to stimulate exports.
3. Various facilities like quality control, provision of market information and
arranging exhibition of exportable goods in foreign countries.
4. Goods meant for export can be exempted from various taxes as an incentive
to the exporters.
5. Export oriented industries may be encouraged by providing tax benefits,
finances, raw materials etc. so that cost of production goes down and
exports become competitive in the international market.
6. Attempts should also be made to encourage tourism by attracting foreign
tourists by providing good hotels, transportation etc. so as to earn large
amount of foreign exchange.

37. Exchange Control
It is an extreme step taken by the monetary authority to enjoy complete
control over the exchange dealings.
Under such a measure, the central bank directs all exporters to surrender
their foreign exchange to the central authority. Thus it leads to
concentration of exchange reserves in the hands of central authority.
At the same time, the supply of foreign exchange is restricted only for
essential goods.
It can only help controlling situation from turning worse.
In short it is only a temporary measure and not permanent remedy.

38. Production of Import substitutes
1. A country may resort to import substitution to reduce the volume of imports and
make it self-reliant.
1. Fiscal and monetary measures may be adopted to encourage industries producing
import substitutes.
1. Industries which produce import substitutes require special attention in the form of
various concessions, which include tax concession, technical assistance,
subsidies,providing scarce inputs, etc.
1. Non-monetary methods are more effective than monetary methods and are
normally applicable in correcting an adverse balance of payments.

39. Monetary Policy
A strict monetary can be effectively used to reduce expenditure and
correct deficit in BOP.
Central Bank will reduce the volume of credit by raising the bank rate
by selling the approved securities in the open market and by

42. ForeignExchange Rate