PRESENTATION PRESENTATION ONON

SIGNIFICANCE SIGNIFICANCE OF OF

BALANCE OF PAYMENTBALANCE OF PAYMENT

PRESENTED BY:PRESENTED BY:

PAWAN KAWANROLL NO: 14MBA IV TRI

UNIGLOBE COLLEGE

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Balance of Payments

The Balance of Payments is the statistical record of a

country’s international transactions over a certain period of time presented in the form of double-entry bookkeeping.

Typically maintained in a single currency.

Significance of BOP

The BOP provides detailed information about the supply and demand of the country’s currency. The trade statistics in the Current Account, for example,

show the composition of trade – what a country imports and what it exports.

The Capital Account shows inflows and outflows of capital in various categories.

Helps to evaluate the economic performance of the countries in international trade

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Significance of BOP Cont…

Helps in identifying appropriate trading partner

Provides economic information about a particular country

BOP position gives important input for the anticipation of appreciation or depreciation of a particular country’s currency

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Balance of Payment Accounts

Double-entry bookkeeping

each entry is recorded twice. A debit entry a payment to foreigners A credit entry a receipt from foreigners

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Example 1

Suppose that Boeing Corporation exported a Boeing 747 aircraft to Japan Airlines for $50 million and that Japan Airlines pays from its dollar bank account kept with Chase Manhattan Bank in New York City. Then the receipt of $50 million by Boeing will be recorded as a credit(+), which will be matched by a debt (-) of the same amount representing a reduction of the U.S. bank’s liabilities.

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Entry of Example 1

Transactions Credit Debit

Boeing’s export + $50 million

Withdrawal from U.S. bank

- $50 million

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Example 2

Suppose that Boeing imports jet engines produced by Rolls Royce for $ 30 million, and that Boeing make payment by transferring the funds to a New York bank account kept by Rolls Royce. In this case, payment by Boeing will be recorded as a debit (-), whereas the deposit of the funds by Rolls Royce will be recorded as a credit (+).

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Entry of Example 2

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Transactions Credit Debit

Boeing’s import - $ 30 million

Deposit at U.S. bank

+ $ 30 million

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They are composed of the following: The Current Account The Capital Account The Official Reserve Account

Balance of Payments Accounts

Balance of Payments Accounts Cont…

Current Account The current account includes the export and import of goods and

services.

Capital Account It includes all purchases and sales of assets such as stocks, bonds, bank

accounts, real estate and businesses.

Official reserve account It covers all purchases and sales of international reserve assets such as

dollars, foreign exchanges, gold and special drawings rights (SDRs)

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Balance of Payments Trends in Major Countries

From 1982-2000, U.S. has had continual annual trade deficits (-CA) with the rest of the world (ROW), along with annual capital surpluses (+KA), in roughly equal annual amounts. 

China has been running trade surpluses AND capital account surpluses.  For example, in 2002 China had a $35.4B trade surpluses and a $6.4B capital inflow. 

Impact on Currency

CA: All the other factors constant, a deficit balance on a country’s current account implies that there is excess supply of its currency in the foreign markets. Hence, its currency should depreciate.

KA: All other factors constant, a surplus balance in a country’s financial account implies that there is excess demand for assets denominated in its currency. Hence, its currency should appreciate.

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Balance of payments crisis

A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports and/or service its debt repayments.

Typically, this is accompanied by a rapid decline in the value of the affected nation's currency.

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Imports and Exports trend of Nepal

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THANK YOU

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