Page 1
Balance of Payments
Institute of Lifelong Learning, University of Delhi
Subject: Macroeconomics
Lesson: Balance of Payments
Lesson Developer: Sanjeev Kumar
College/ Department: DSC, Delhi University
Page 2
Balance of Payments
Institute of Lifelong Learning, University of Delhi
Subject: Macroeconomics
Lesson: Balance of Payments
Lesson Developer: Sanjeev Kumar
College/ Department: DSC, Delhi University
Balance of Payments
Institute of Lifelong Learning, University of Delhi
TABLE OF CONTENTS
? LEARNING OUTCOMES
? SECTON I: INTRODUCTION
? Balance of Trade
? Balance of Payments
? SECTON II: ACCOUNTS OF BALANCE OF PAYMENTS
? Current Account
? Capital and Financial Account
? SECTON III: IS THE BALANCE OF PAYMENTS ALWAYS BALANCES
? SECTON IV: REASONS FOR DISEQUILIBRIUM IN BALANCE OF
PAYMENT
? Economic Factors
? Political Factors
? Social Factors
? Natural Factors
? SECTON V: PERFORMANCE OF INDIA’S BALANCE OF PAYMENTS
? QUESTIONS FOR EXERCISES
? Multiple Choice Questions
? Short Questions
? Long Questions
? Glossary
? References
Learning Outcomes of the Chapter
After read this chapter, you should be familiar with the following aspects;
Page 3
Balance of Payments
Institute of Lifelong Learning, University of Delhi
Subject: Macroeconomics
Lesson: Balance of Payments
Lesson Developer: Sanjeev Kumar
College/ Department: DSC, Delhi University
Balance of Payments
Institute of Lifelong Learning, University of Delhi
TABLE OF CONTENTS
? LEARNING OUTCOMES
? SECTON I: INTRODUCTION
? Balance of Trade
? Balance of Payments
? SECTON II: ACCOUNTS OF BALANCE OF PAYMENTS
? Current Account
? Capital and Financial Account
? SECTON III: IS THE BALANCE OF PAYMENTS ALWAYS BALANCES
? SECTON IV: REASONS FOR DISEQUILIBRIUM IN BALANCE OF
PAYMENT
? Economic Factors
? Political Factors
? Social Factors
? Natural Factors
? SECTON V: PERFORMANCE OF INDIA’S BALANCE OF PAYMENTS
? QUESTIONS FOR EXERCISES
? Multiple Choice Questions
? Short Questions
? Long Questions
? Glossary
? References
Learning Outcomes of the Chapter
After read this chapter, you should be familiar with the following aspects;
Balance of Payments
Institute of Lifelong Learning, University of Delhi
? Balance of payments and balance of trade
? Current and capital account of balance of payments
? Analysis of the causes and correction of disequilibrium of balance of payments
? The role of balance of trade and balance of payments in the development of
macroeconomic policy.
? Examine the balance of payments current account and capital account for national
economy i.e., India.
SECTION I: INTRODUCTION
During the current age, there is no country, which is self sufficient in terms to produce all
the goods and services for their all needs. Each country imports of all those goods and services
which are not produce in these countries or produce at higher cost. Similarly, country exports of
all those goods and services which are prefer to buy residents of foreign country as compare to
its residents. So, all of economic transactions, every country have a balance of payments sheet
for its account.
The Balance of payments (BOP) of a country is a systematical accounting record of all
monetary transactions with the rest of the world during the given year. Basically, the country's
exports and imports of goods, services, financial capital, and financial transfers are included in
these transactions payments. The BOP account is a statistical record of a country’s economic
relationships with rest of the world.
According to Bon Sodersten, “The balance of payments is merely a way of listing receipts and
payments in international transactions for a country.”
According to Cohen, “It shows the country’s trading position, changes in its net position as
foreign lender or borrower, and changes in its official reserve holding.”
Basically, the balance of payments account of a country is constructed on the principle of
double entry book keeping. Because balance of payment entry book keeping two side i.e. credit
side (+ left side) and debits side (- right side). There are mainly three types of transaction of
residents of a country to the residents of rest of the world;
? Visible items relating transaction i.e. exports and imports of physical goods such
as computer, mobile phone, aircraft, oil product sugar, jute, cloths, jams and
jewelry etc. Receipts from export items are recorded as positive entry or credit for
a nation. On the other side payments for import items are recorded as negative
entry or debit for a nation.
? Invisible items relating transaction i.e. exports and imports of all type services
such as banking, shipping, traveling, insurance, financial, government services
etc. Receipts from export of services items are recorded as positive entry or credit
for a nation. On the other side payments for import of services items are recorded
as negative entry or debit for a nation.
Page 4
Balance of Payments
Institute of Lifelong Learning, University of Delhi
Subject: Macroeconomics
Lesson: Balance of Payments
Lesson Developer: Sanjeev Kumar
College/ Department: DSC, Delhi University
Balance of Payments
Institute of Lifelong Learning, University of Delhi
TABLE OF CONTENTS
? LEARNING OUTCOMES
? SECTON I: INTRODUCTION
? Balance of Trade
? Balance of Payments
? SECTON II: ACCOUNTS OF BALANCE OF PAYMENTS
? Current Account
? Capital and Financial Account
? SECTON III: IS THE BALANCE OF PAYMENTS ALWAYS BALANCES
? SECTON IV: REASONS FOR DISEQUILIBRIUM IN BALANCE OF
PAYMENT
? Economic Factors
? Political Factors
? Social Factors
? Natural Factors
? SECTON V: PERFORMANCE OF INDIA’S BALANCE OF PAYMENTS
? QUESTIONS FOR EXERCISES
? Multiple Choice Questions
? Short Questions
? Long Questions
? Glossary
? References
Learning Outcomes of the Chapter
After read this chapter, you should be familiar with the following aspects;
Balance of Payments
Institute of Lifelong Learning, University of Delhi
? Balance of payments and balance of trade
? Current and capital account of balance of payments
? Analysis of the causes and correction of disequilibrium of balance of payments
? The role of balance of trade and balance of payments in the development of
macroeconomic policy.
? Examine the balance of payments current account and capital account for national
economy i.e., India.
SECTION I: INTRODUCTION
During the current age, there is no country, which is self sufficient in terms to produce all
the goods and services for their all needs. Each country imports of all those goods and services
which are not produce in these countries or produce at higher cost. Similarly, country exports of
all those goods and services which are prefer to buy residents of foreign country as compare to
its residents. So, all of economic transactions, every country have a balance of payments sheet
for its account.
The Balance of payments (BOP) of a country is a systematical accounting record of all
monetary transactions with the rest of the world during the given year. Basically, the country's
exports and imports of goods, services, financial capital, and financial transfers are included in
these transactions payments. The BOP account is a statistical record of a country’s economic
relationships with rest of the world.
According to Bon Sodersten, “The balance of payments is merely a way of listing receipts and
payments in international transactions for a country.”
According to Cohen, “It shows the country’s trading position, changes in its net position as
foreign lender or borrower, and changes in its official reserve holding.”
Basically, the balance of payments account of a country is constructed on the principle of
double entry book keeping. Because balance of payment entry book keeping two side i.e. credit
side (+ left side) and debits side (- right side). There are mainly three types of transaction of
residents of a country to the residents of rest of the world;
? Visible items relating transaction i.e. exports and imports of physical goods such
as computer, mobile phone, aircraft, oil product sugar, jute, cloths, jams and
jewelry etc. Receipts from export items are recorded as positive entry or credit for
a nation. On the other side payments for import items are recorded as negative
entry or debit for a nation.
? Invisible items relating transaction i.e. exports and imports of all type services
such as banking, shipping, traveling, insurance, financial, government services
etc. Receipts from export of services items are recorded as positive entry or credit
for a nation. On the other side payments for import of services items are recorded
as negative entry or debit for a nation.
Balance of Payments
Institute of Lifelong Learning, University of Delhi
? Capital and financial relating transaction i.e. receipt and payment of capital such
compensation of employee, income from investment i.e. foreign direct investment
and portfolio investment, government transfer and other transfer. Receipts from
external assistance, commercial borrowing, NRI deposits, foreign investment and
other capital flows are recorded as positive entry or credit for a nation. On the
other side payments for these aspects are recorded as negative entry or debit for a
nation. .
In short, the sum of credit side and debits side must be equal to zero in balance of
payments.
Total Credits + Total Debits = Zero
Balance of Trade (BOT): Balance of trade (BOT) is the relating only physically import and
export of a country. It measures as the difference between in the value of export and import of
the goods and services. In this account a nation takes only visible items relating transaction. Thus
balance of payment is a systematical accounting record of all visible items with the rest of the
world during the given balanced year. The balance of payment may be equal, deficit or surplus
during a given period of time. It is not necessary that exports are equal to the import. Because the
proportion of exports and imports of a nation are not equal. If the value of exports exceeds the
value of imports the country is called a favourable balance of trade or export surplus. On the
other side, if the value of imports exceeds the value of exports, it is called a unfavourable
(adverse) balance of trade or deficit trade.
Distinguish between Balance of Payment and Balance of Trade: The differences between
balance of payment and balance of trade are given table;
Balance of Trade Balance of Payments
? The balance of trade includes only
visible items i.e. exports and imports of
goods and services
? The balance of payments includes
visible as well as non-visible items and
capital and financial transfers
? Balance of trade can be surplus or
deficit i.e. favourable or unfabourable
? The balance of payments is always
balance
? Balance of trade is the internal
components of balance of payments. It
is narrow concept at the international
level
? The balance of payments is the broad
concept. Because it gives a detail clear
economic picture of a nation at the
international level.
SECTION II: ACCOUNTS OF BALANCE OF PAYMENTS
There are two main components of account of balance of payments;
Page 5
Balance of Payments
Institute of Lifelong Learning, University of Delhi
Subject: Macroeconomics
Lesson: Balance of Payments
Lesson Developer: Sanjeev Kumar
College/ Department: DSC, Delhi University
Balance of Payments
Institute of Lifelong Learning, University of Delhi
TABLE OF CONTENTS
? LEARNING OUTCOMES
? SECTON I: INTRODUCTION
? Balance of Trade
? Balance of Payments
? SECTON II: ACCOUNTS OF BALANCE OF PAYMENTS
? Current Account
? Capital and Financial Account
? SECTON III: IS THE BALANCE OF PAYMENTS ALWAYS BALANCES
? SECTON IV: REASONS FOR DISEQUILIBRIUM IN BALANCE OF
PAYMENT
? Economic Factors
? Political Factors
? Social Factors
? Natural Factors
? SECTON V: PERFORMANCE OF INDIA’S BALANCE OF PAYMENTS
? QUESTIONS FOR EXERCISES
? Multiple Choice Questions
? Short Questions
? Long Questions
? Glossary
? References
Learning Outcomes of the Chapter
After read this chapter, you should be familiar with the following aspects;
Balance of Payments
Institute of Lifelong Learning, University of Delhi
? Balance of payments and balance of trade
? Current and capital account of balance of payments
? Analysis of the causes and correction of disequilibrium of balance of payments
? The role of balance of trade and balance of payments in the development of
macroeconomic policy.
? Examine the balance of payments current account and capital account for national
economy i.e., India.
SECTION I: INTRODUCTION
During the current age, there is no country, which is self sufficient in terms to produce all
the goods and services for their all needs. Each country imports of all those goods and services
which are not produce in these countries or produce at higher cost. Similarly, country exports of
all those goods and services which are prefer to buy residents of foreign country as compare to
its residents. So, all of economic transactions, every country have a balance of payments sheet
for its account.
The Balance of payments (BOP) of a country is a systematical accounting record of all
monetary transactions with the rest of the world during the given year. Basically, the country's
exports and imports of goods, services, financial capital, and financial transfers are included in
these transactions payments. The BOP account is a statistical record of a country’s economic
relationships with rest of the world.
According to Bon Sodersten, “The balance of payments is merely a way of listing receipts and
payments in international transactions for a country.”
According to Cohen, “It shows the country’s trading position, changes in its net position as
foreign lender or borrower, and changes in its official reserve holding.”
Basically, the balance of payments account of a country is constructed on the principle of
double entry book keeping. Because balance of payment entry book keeping two side i.e. credit
side (+ left side) and debits side (- right side). There are mainly three types of transaction of
residents of a country to the residents of rest of the world;
? Visible items relating transaction i.e. exports and imports of physical goods such
as computer, mobile phone, aircraft, oil product sugar, jute, cloths, jams and
jewelry etc. Receipts from export items are recorded as positive entry or credit for
a nation. On the other side payments for import items are recorded as negative
entry or debit for a nation.
? Invisible items relating transaction i.e. exports and imports of all type services
such as banking, shipping, traveling, insurance, financial, government services
etc. Receipts from export of services items are recorded as positive entry or credit
for a nation. On the other side payments for import of services items are recorded
as negative entry or debit for a nation.
Balance of Payments
Institute of Lifelong Learning, University of Delhi
? Capital and financial relating transaction i.e. receipt and payment of capital such
compensation of employee, income from investment i.e. foreign direct investment
and portfolio investment, government transfer and other transfer. Receipts from
external assistance, commercial borrowing, NRI deposits, foreign investment and
other capital flows are recorded as positive entry or credit for a nation. On the
other side payments for these aspects are recorded as negative entry or debit for a
nation. .
In short, the sum of credit side and debits side must be equal to zero in balance of
payments.
Total Credits + Total Debits = Zero
Balance of Trade (BOT): Balance of trade (BOT) is the relating only physically import and
export of a country. It measures as the difference between in the value of export and import of
the goods and services. In this account a nation takes only visible items relating transaction. Thus
balance of payment is a systematical accounting record of all visible items with the rest of the
world during the given balanced year. The balance of payment may be equal, deficit or surplus
during a given period of time. It is not necessary that exports are equal to the import. Because the
proportion of exports and imports of a nation are not equal. If the value of exports exceeds the
value of imports the country is called a favourable balance of trade or export surplus. On the
other side, if the value of imports exceeds the value of exports, it is called a unfavourable
(adverse) balance of trade or deficit trade.
Distinguish between Balance of Payment and Balance of Trade: The differences between
balance of payment and balance of trade are given table;
Balance of Trade Balance of Payments
? The balance of trade includes only
visible items i.e. exports and imports of
goods and services
? The balance of payments includes
visible as well as non-visible items and
capital and financial transfers
? Balance of trade can be surplus or
deficit i.e. favourable or unfabourable
? The balance of payments is always
balance
? Balance of trade is the internal
components of balance of payments. It
is narrow concept at the international
level
? The balance of payments is the broad
concept. Because it gives a detail clear
economic picture of a nation at the
international level.
SECTION II: ACCOUNTS OF BALANCE OF PAYMENTS
There are two main components of account of balance of payments;
Balance of Payments
Institute of Lifelong Learning, University of Delhi
? Current Account
? Capital and Financial Account
According to International Monetary Fund (IMF), there are five accounts of balance of
payments. They are;
? Current Account
? Capital Account
? Financial Account
? Net Errors and Omissions
? Reserves and Related Items
Further, IMF divided of these accounts in two broad parts; first one is current account and
second one is capital and financial account (capital account) which is included capital account,
financial account, net error and omissions, reserves and related items. Basically capital account is
the sum of capital, financial, net error and reserves.
Balance of payments on current account includes goods, services, income and current
transfer of a country with the rest of world. Main Components of a balance of payments on
current account are given below;
BOP Components of Current Account
Components Items
Goods Account ? Import and export of only tangible goods such as
computer, sugar, jute, cloths, jewelry etc.
Service Account ? Banking and Shipping
? Travel
? Other Services
? Communications services
? Construction services
? Insurance services
? Financial services
? Computer and information services
? Royalties and license fees
? Other business services
? Personal, cultural, and recreational services
? Government services
Income Account ? Compensation of Employees (wages, salaries, and
other benefits)
? Income from Investment
? Income from Direct Investment (income on
equity and income on debt)
? Income from Portfolio Investment (income
on equity and income on debt)
? Income from Other Investment (income on
loans and others)
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