Description
The PPT explaining about Balance of Payments (BOP)
BALANCE OF PAYMENTS
? The Balance of Payments of a country is a
systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries.
Definition
? The balance of payments, (or BOP) measures
the payments that flow between any individual country and all other countries. ? It is used to summarize all international economic transactions for that country during a specific time period, usually a year. ? The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers.
Balance of Payment
? Any transaction that results in a receipt
from foreigners will be recorded as a credit and any transaction that results to a payment to foreigners will be recorded as a debit. ? Debit entries give rise to the demand for forex and credit entries give rise to the supply of forex
Balance of Payment
? A system of double-entry book-keeping.
Every credit in the account is balanced by a matching debit and vice versa. ? Example : India exported Tea worth $1 million to U.S.A. and that U.S.A. paid from its dollar account with Bank of America. Receipt of $1 million will reflect a credit as merchandise exports and debit as increase in claims on a foreign bank
Components of Balance Of Payments
? Current Account ? Capital Account
? Reserve Account
CURRENT ACCOUNT
? The current account of the balance of payments is the
sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). ? A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse.
? A deficit on the current account = A surplus in the capital
account
Or in the other case, ? A surplus on the current account = A deficit on the capital Account
STRUCTURE OF THE CURRENT ACCOUNT IN INDIA’S BOP STATEMENT A. I. II. a. CURRENT ACCOUNT MERCHANDISE INVISIBLES (a+b+c) SERVICES
1.
CREDITS
DEBITS
NET
TRAVEL TRANSPORTATION INSURANCE
2. 3.
4. GOVERNMENT NOT ELSEWHERE CLASSIFIED
5.
b.
MISCELLANEOUS
TRANSFERS 6. OFFICIAL 7. PRIVATE
CAPITAL ACCOUNT
? Capital Account is divided into three parts:?
Private capital – Long term & Short term capital. Long term private capital includes Foreign investments – both direct & portfolio, long term loans, foreign currency deposits, estimated portion of the unclassified receipts to the capital account. Banking capital covers movements in the external financial assets and liabilities of commercial and cooperative banks authorised to deal in foreign exchange. Official capital, RBI’s holdings in terms of foreign currency , and Special Drawing Rights held by government are categorised into: loans, amortisation, and miscellaneous receipts and payments.
?
?
STRUCTURE OF THE CAPITAL ACCOUNT
B
1. (a)
CAPITAL ACCOUNT (1TO 5)
FOREIGN INVESTMENT (a+b) In India (i) Direct (ii) Portfolio
CREDIT
DEBIT
NET
(b) 2. (a)
Abroad LOANS (a+b+c) External Assistance (i) By India (ii) To India
(b)
Commercial Borrowings (MT and LT) (i) By India (ii) To India
©
3. (a)
Short –Term To India
BANKING CAPITAL (a+b) Commercial Banks (i) Assets (ii) Liabilities (iii) Non-Resident Deposits
(b) 4. 5.
Others RUPEE DEBT SERVICE OTHER CAPITAL TOTAL CAPITAL ACCOUNT (1 TO 5)
? Official Settlements Account – Official Settlements Account represent the official sales of foreign currencies and other reserves to foreign countries or official purchase of foreign currencies or other reserves from foreign countries.
Accounting Principles in BOP
? The BOP is a double-entry accounting record
and as such is subject to all the rules of double entry book keeping, viz. for every transaction two entries must be made, one credit (+) and one debit (-).
? The BOP must always “balance”.
Accounting Principles in BOP
? Transactions resulting payment from the rest of the world
(ROW) to the country are treated as credit entries and actual payments are treated as debits. Converse is equally applicable . Increase in foreign assets or decrease in foreign liability appears as a debit entry.
? Transactions resulting in increase in demand for foreign
exchange gets recorded as a debit entry whereas transaction resulting in increase in the supply of foreign exchange gets recorded as credit entry.
BOP Identity
? BCA + BKA + BRA = 0
? Balance on the BRA represents the
change in the official reserves ? In case BCA + BKA results in negative the country will supply foreign exchange out of its reserve holdings. But in case of persisting deficit the country will eventually run out of reserves and may be forced to devalue its currency.
Correction of Disequilibrium
? Monetary Measures :
? Monetary contraction – Money supply
influences aggregate domestic demand, domestic price level and demand for imports and exports. ? Devaluation ? Exchange Control
Correction of Disequilibrium
? Trade measures –
? Export promotion ? Import control
? Miscellaneous measures
Factors affecting Exchange Rates
? BOP
? Strength of an economy ? Fiscal Policy
? Interest Rates
? Monetary Policy ? Political factors
? Intervention
? Expectation
? Autonomous transaction- undertaken for
its own sake ? Accomodating / compensatory transaction - undertaken with the motive of settling the imbalances arising out of other transactions ? All autonomous transactions are grouped together “ above the line “ transactions and all accomodating transactions “below the line “
Domestic savings, Investment and Capital A/c
? Y=C+S
? E=C+I ? Y-E=S–I ? If Y > E = S > I = Surplus capital which must be invested
overseas.
= S=s I + If
? Y = Income, C = Consumption, S= Savings,
I = Investment, E = Expenditure, If = Foreign Investment
OR ? If = Pf + Puf + ? OR
? Pf + Puf = Capital A/c deficit if outflow is
positive. ? ?OR = BALANCE IN OR A/C ? Fully floating system = Excess Savings = Capital A/c deficit or Saving Capital A/c Surplus.
? A nation produces more than it spends
=will save more than it invests domestically = will have a net capital outflow. This capital outflow will show as capital A/C deficit and OR increase
? A nation spends more than it produces
will invest domestically more than it saves = will have a net capital inflow. This capital inflow will show a capital A/C surplus + OR reduction.
Link between Current & Capital A/C
?Y – E = X – I
? Current A/C surplus happens when
national income / outflow exceeds national spending. ?S – I = X – I ? S > I Lead to Current A/C surplus ? Savings – Investment equals net foreign inflow. ? Net Foreign Investment = X - I
? Balance on current A/c = Net Capital
outflow. ? Foreign exchange earned by selling abroad must be spent on imports or settle claims against foreigners. So, if the current A//C is +ve country must be a net exporter of capital. Current A/C deficit means country must be a Net capital importer
? Goods & Services bought – Goods & Services
produced must be acquired through foreign trade and must be financed by an equal amount of borrowing from abroad (capital a/c surplus or OR deficit). In a fully floating system current A/c balance & capital A/c balance must offset each other. ? With govt. intervention current A/c balance + capital A/c balance + OR balance must be zero.
? If a nation produces more than it spends,
it saves more than it invests and exports more than it imports resulting capital outflow. ? If a nation spends more than it produces, it will invest more than it saves and imports more than it exports resulting capital inflow.
doc_789821820.ppt
The PPT explaining about Balance of Payments (BOP)
BALANCE OF PAYMENTS
? The Balance of Payments of a country is a
systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries.
Definition
? The balance of payments, (or BOP) measures
the payments that flow between any individual country and all other countries. ? It is used to summarize all international economic transactions for that country during a specific time period, usually a year. ? The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers.
Balance of Payment
? Any transaction that results in a receipt
from foreigners will be recorded as a credit and any transaction that results to a payment to foreigners will be recorded as a debit. ? Debit entries give rise to the demand for forex and credit entries give rise to the supply of forex
Balance of Payment
? A system of double-entry book-keeping.
Every credit in the account is balanced by a matching debit and vice versa. ? Example : India exported Tea worth $1 million to U.S.A. and that U.S.A. paid from its dollar account with Bank of America. Receipt of $1 million will reflect a credit as merchandise exports and debit as increase in claims on a foreign bank
Components of Balance Of Payments
? Current Account ? Capital Account
? Reserve Account
CURRENT ACCOUNT
? The current account of the balance of payments is the
sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). ? A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse.
? A deficit on the current account = A surplus in the capital
account
Or in the other case, ? A surplus on the current account = A deficit on the capital Account
STRUCTURE OF THE CURRENT ACCOUNT IN INDIA’S BOP STATEMENT A. I. II. a. CURRENT ACCOUNT MERCHANDISE INVISIBLES (a+b+c) SERVICES
1.
CREDITS
DEBITS
NET
TRAVEL TRANSPORTATION INSURANCE
2. 3.
4. GOVERNMENT NOT ELSEWHERE CLASSIFIED
5.
b.
MISCELLANEOUS
TRANSFERS 6. OFFICIAL 7. PRIVATE
CAPITAL ACCOUNT
? Capital Account is divided into three parts:?
Private capital – Long term & Short term capital. Long term private capital includes Foreign investments – both direct & portfolio, long term loans, foreign currency deposits, estimated portion of the unclassified receipts to the capital account. Banking capital covers movements in the external financial assets and liabilities of commercial and cooperative banks authorised to deal in foreign exchange. Official capital, RBI’s holdings in terms of foreign currency , and Special Drawing Rights held by government are categorised into: loans, amortisation, and miscellaneous receipts and payments.
?
?
STRUCTURE OF THE CAPITAL ACCOUNT
B
1. (a)
CAPITAL ACCOUNT (1TO 5)
FOREIGN INVESTMENT (a+b) In India (i) Direct (ii) Portfolio
CREDIT
DEBIT
NET
(b) 2. (a)
Abroad LOANS (a+b+c) External Assistance (i) By India (ii) To India
(b)
Commercial Borrowings (MT and LT) (i) By India (ii) To India
©
3. (a)
Short –Term To India
BANKING CAPITAL (a+b) Commercial Banks (i) Assets (ii) Liabilities (iii) Non-Resident Deposits
(b) 4. 5.
Others RUPEE DEBT SERVICE OTHER CAPITAL TOTAL CAPITAL ACCOUNT (1 TO 5)
? Official Settlements Account – Official Settlements Account represent the official sales of foreign currencies and other reserves to foreign countries or official purchase of foreign currencies or other reserves from foreign countries.
Accounting Principles in BOP
? The BOP is a double-entry accounting record
and as such is subject to all the rules of double entry book keeping, viz. for every transaction two entries must be made, one credit (+) and one debit (-).
? The BOP must always “balance”.
Accounting Principles in BOP
? Transactions resulting payment from the rest of the world
(ROW) to the country are treated as credit entries and actual payments are treated as debits. Converse is equally applicable . Increase in foreign assets or decrease in foreign liability appears as a debit entry.
? Transactions resulting in increase in demand for foreign
exchange gets recorded as a debit entry whereas transaction resulting in increase in the supply of foreign exchange gets recorded as credit entry.
BOP Identity
? BCA + BKA + BRA = 0
? Balance on the BRA represents the
change in the official reserves ? In case BCA + BKA results in negative the country will supply foreign exchange out of its reserve holdings. But in case of persisting deficit the country will eventually run out of reserves and may be forced to devalue its currency.
Correction of Disequilibrium
? Monetary Measures :
? Monetary contraction – Money supply
influences aggregate domestic demand, domestic price level and demand for imports and exports. ? Devaluation ? Exchange Control
Correction of Disequilibrium
? Trade measures –
? Export promotion ? Import control
? Miscellaneous measures
Factors affecting Exchange Rates
? BOP
? Strength of an economy ? Fiscal Policy
? Interest Rates
? Monetary Policy ? Political factors
? Intervention
? Expectation
? Autonomous transaction- undertaken for
its own sake ? Accomodating / compensatory transaction - undertaken with the motive of settling the imbalances arising out of other transactions ? All autonomous transactions are grouped together “ above the line “ transactions and all accomodating transactions “below the line “
Domestic savings, Investment and Capital A/c
? Y=C+S
? E=C+I ? Y-E=S–I ? If Y > E = S > I = Surplus capital which must be invested
overseas.
= S=s I + If
? Y = Income, C = Consumption, S= Savings,
I = Investment, E = Expenditure, If = Foreign Investment
OR ? If = Pf + Puf + ? OR
? Pf + Puf = Capital A/c deficit if outflow is
positive. ? ?OR = BALANCE IN OR A/C ? Fully floating system = Excess Savings = Capital A/c deficit or Saving Capital A/c Surplus.
? A nation produces more than it spends
=will save more than it invests domestically = will have a net capital outflow. This capital outflow will show as capital A/C deficit and OR increase
? A nation spends more than it produces
will invest domestically more than it saves = will have a net capital inflow. This capital inflow will show a capital A/C surplus + OR reduction.
Link between Current & Capital A/C
?Y – E = X – I
? Current A/C surplus happens when
national income / outflow exceeds national spending. ?S – I = X – I ? S > I Lead to Current A/C surplus ? Savings – Investment equals net foreign inflow. ? Net Foreign Investment = X - I
? Balance on current A/c = Net Capital
outflow. ? Foreign exchange earned by selling abroad must be spent on imports or settle claims against foreigners. So, if the current A//C is +ve country must be a net exporter of capital. Current A/C deficit means country must be a Net capital importer
? Goods & Services bought – Goods & Services
produced must be acquired through foreign trade and must be financed by an equal amount of borrowing from abroad (capital a/c surplus or OR deficit). In a fully floating system current A/c balance & capital A/c balance must offset each other. ? With govt. intervention current A/c balance + capital A/c balance + OR balance must be zero.
? If a nation produces more than it spends,
it saves more than it invests and exports more than it imports resulting capital outflow. ? If a nation spends more than it produces, it will invest more than it saves and imports more than it exports resulting capital inflow.
doc_789821820.ppt