B ALANCE OF PAYMENT MEANING :- It is a systematic record of all economic transaction between the residents of a country and the rest of the world in a given period of time, usually one yea r. According to BENHAM Balance of Payment of a country is a rec ord of the country is a record of the monetary transaction over a period with rest of the world. According to KINDLEBERGER The Balance of Payment of a country is a systematic record of all economic transactions concerning goods, services and capital flow between its residents and residents of foreign countries. FEATURES OF BOP : 1. Systematic Record ; record of all receipts and payments. 2. Fixed Period of Time: Statement for a given period of time. 3. Comprehensiveness : All items i.e. visible, invisible, and capital transfers. 4. Double Entry : entries of both receipts and payments. 5. Balanced System : debits and credits sides of account. BALANCE OF TRADE MEANING : It is a merchandise balance. It shows visible trade transactions with the rest of the world during a year. TYPES OF BOT 1. Favourable BOT: when the total value of the goods exported by it exceeds the total value of the goods imported by it. 2. Unfavourable BOT: when the total value of the goods imported above the total value of the goods exported by it. 3. Equilibrium BOT: when the total value of the goods exported by it is equal to the total value of the goods imported by it. 1. Current Accounts: It is that account which records imports and exports of goods and services and unilateral transfers. COMPONENTS 1. Export and Import of visible goods: 2. Invisible items-services: i. services rendered by commercial undertakings:- commercial undertakings like shipping companies, insurance companies, banks, etc., belonging to different countries exchange their services. Exchange of such services is included in current acc. ii. Serve of Experts : Every country avails the services of foreign experts like doctor,engineers, soldiers etc. also offers services of its experts to other countries. The services receives from abroad and services rendered to for. iii. Travelling: Its the only main invisible items of balance of payments. Travellings may relates to business, education,health and conventions or pleasure trips etc. iv. Transportations: Movements of good from one to another. Use of domestic transport by the foreigners amounts to export and use of foreign transport by the residents amounts to imports. v. Investment Income : Interest, rent, dividend and profit also from an invisible item of BOP. When country gets income from its investment abroad it is recorded under the head receipts. One the other hand, when foreign investors earn income from our country, then it is recorded under the head payments. vi. Governmental Transactions : Each govt. establishes its embassies, offices of high commissioners and other missions abroad and spends on their maintenance. Such an expenditure is treated as payments. Subscriptions made to international institutions are also included in this category. vi. Donations and Gifts: Donations and gifts received from abroad are included under receipts and donation and gifts, etc., given to other countries are included under payments. 2. Capital Accounts: Capital account is that account which records all such transactions between residents of a country and rest of the world which cause a change in the asset or liability status of the residents of a country or its govt. Components 1) Private Foreign Loan Flow: Foreign loans received by the private sector are counted as credit items and repayment of these loans is counted as debit items. 2) Movement in Banking Capital: Besides central bank, inflow of banking capital is counted as credit items and outflow as debit item. 3) Official capital transactions ;loans received by public sector from abroad or IMF constitute credit items and loans repaid debit items. 4) Reserves,Monitory gold and SDR foreign currency assets of the govt.gold reserves of the central bank, SDR of IMF and similar capital transaction are included under credit items and all kinds of payments under debit items. 5) gold movement: when the central bank of the country buys the gold from the abroad,it makes payment to foreign sellers. It is reflected under debit items. On the contrary, when its sells gold it is reflected under credit items. A UTONOMOUS AND ACCOMMODATING ITEMS OF BOP Autonomous items : 1.which are related ton such transactions as are determined by the motive of profit maximization. 2. which are not conditioned by the BOP status of the country-positive /negative or favourable/unfavourable. 3. which are not ment to establish BOP identity. Autonomous items in BOP accounts are often referred to as above the line items. Accommodating Items: 1. which are not related to such transactions as are determined by the motive of profit maximaisation. 2. which are conditioned by the positive or negative BoP status of the country. 3. which are meant to be establish BoP identity. Accommodating items in BoP accounts are often referred to as below the line items. BALANCE OF PAYMENTS ALWAYS BALANCES It is balance because, under double entry system receipts and payments are always equal. Balance of Payment in Accounting Sense: Because accounts are prepare on the basis of double entry system. Under the system, receipts side is always equal to payments side. Thus, from this BoP is always balances. Balance of Payment in Operational sense: From practical point of view, it is not necessary that balance of payments may always be balanced. It may turn out to be unbalanced. In operational sense, balance of payment is also called economic balance. Measures to Correct Adverse BoP OR Methods of Correcting Disequilibrium in BoP. 1. Economic Measures, 2. Political Measures, 3. Social Measures, 4. International Measures. Economic Measures A. Monetary Measures. B. Non- Monetary Measures. M ONETARY M EASURES. i. Deflation: That Monetary policy under which the volume of currency in the country is reduced, so that prices and monetary income of the people are brought down. Central Bank of the country contracts the volume of the credit in the economy by raising the bank rate and by restoring to open market operation and other and qualitative methods of credit control. All these measures bring down the prices and monetary income of the people. Fall in domestic prices stimulates exports and reduction in money income of the people discourages imports. Thus, adverse BoP is corrected. ii. Devaluation: That monetary measure under which govt. of lowers the value of currency in terms of foreign currencies. As a result, imports become dearer and exports cheaper. Consequently, exports are expected to rise while imports are expected to fall. iii. Exchange Depreciation : Under the system of flexible rate of exchange, it is demand for and supply of foreign currency that determines the rate of exchange. If the BoP of a country is adverse, its rate of exchange tends to go down owning to limited supply of foreign exchange and its excess demand. Consequently, exports will increases and situation of adverse BoP will be moderated. iv. Exchange Control: Under this, Central Bank of the country tries to control the use of foreign exchange. The central bank being custodian of the countrys forex reserves, tries to build these reserves through restricted use of forex for imports. v. External Debts: Govt. can also secure loans from abroad or international agencies to correct BoP positions. N ON - MONETARY MEASURES. i. Discouraging Imports : a) Import Duties: The govt. may levy new import duties or raise the rate of existing ones. b) Import Quotas: Import are curtailed by fixing import quotas. Under this, govt, fixes a cap on the max. volume or the value of the imports by the firms. c) Import Substitution: When substitution of imported goods are produced indigenously, it is called import substitution. It brings down for for. Goods, relieving a pressure on demand for forex. ii. Export Promotion : Increase export by several ways. iii. Encouragement to foreign investment: Foreign Investment can be affected by offering different kinds of incentives and concessions. iv. Attraction to Foreign Tourists : Bring Foreign Currency. v. State Trading: The State can play the role of flagship in promoting exports. It can explore new markets and offer infrastructural facilities to private exporters. P OLITICAL MEASURES. i. A Check on Political Alliances: Many independent sovereign countries make a political alliance to form one united country on the basis of mutual agreements. ii. Political and Administrative Thriftiness: Non Essential trips should be banned to save forex. Also expenses on the expansion of embassies and missions abroad should be curtailed to the minimum. iii. Change in basic Political Ideology : Change-over from socialist pattern to free market economy by USSR and other socialist countries, liberal industrial policy of the India, are instances of changes in basic political ideologies. SOCIAL MEASURES BoP can also be corrected through the medium of social psychology. During the British regime in India, spread of movement went a long way in curbing imports and correcting the BoP imbalances. Presently, import of petrol and petroleum products is one of the major causes of adverse effect of BoP of India. If social awareness is aroused among the people to make economical use of petrol, it will have a salutary effect on the BoP. I NTERNATIONAL MEASURES Formation of new regional or international alliances or market organizations can help solve crises. SAARC, NAM,EEC,WTO, UNCTAD, etc., are the example of such alliances which have shown encouraging results. D EVALUATION ON B O P Devaluation means deliberate reduction by the govt. in the value of its national currency in term of gold or other foreign currency. It means reduction in external value of national currency. As result of devaluation, purchasing power of national currency in terms of gold or other foreign currency decline. Both devaluation and depreciation mean the same thing, namely a reduction in the value of domestic currency in relation to foreign currency. I MPORTANCE OF B O P 1. Guide to Economic Conditions and Direction: Countries having always a favourable BoP are considered to be economically sound. On the contrary, countries suffering from chronic adverse BoP are treated economically sick and unhealthy. 2. Pictogram of Economic Changes: Changes taking place in economy at different periods of time can be best reflected in its BoP position. 3. Indicator of Foreign Dependency: BoP is an indicator of the extent to which a country is dependent on other countries. 4. Knowledge of Foreign Receipts and Payments: A countrys total receipts and payments are known from its BoP. 5. Knowledge of Foreign Investment: Again it BoP that tells us about the amount of income earned by foreigners on their investment in the country. Likewise, the amount of income earned by the country on its Investment abroad. 6. Indicator of Foreign Trade: A country formulates its foreign trade policy on the basis of this knowledge. 7. Determinant of National Economic Policy : On the basis of BoP that fundamental and structural changes are introduced in the economic policies of a country. 8. Helpful in National Planning : Statistic relating to BoP provide useful information for planning. 9. Helpful for International Financial Organization: It is on the basis of BoP that International Financial Institution determine the amount of financial assistance to be given to a country, as IMF has done in case of India. THANK YOU