Balance of Payments 2011

BALANCE OF PAYMENTS:

BALANCE OF PAYMENTS

Balance of Payments: Meaning :

Balance of Payments: Meaning It is a systematic record of a country’s economic transactions with the outside world in a given year In balance of payment accounting credits are shown on the left side & debits on the right side of balance sheet Payment received from a foreign country is a credit transaction Payment to a foreign country is a debit transaction

Balance of Payments:

Balance of Payments Credit side: Exports of goods & services, transfer receipts in form of gifts. Grants etc from foreigners, borrowing from abroad, investments by foreigners in the country, official sale of reserve assets including gold to foreign countries & international agencies Debit side: Imports of goods & services, transfer payments to foreigners as gifts, grants etc, lending to foreign countries, investments by residents to foreign countries & official purchase of reserve assets or gold from foreign countries & international agencies

Balance of Payments:

Balance of Payments Credit & debit items shown vertically in balance of payments accounts Horizontally they are divided into three categories: The current account The capital account The official settlement account or official reserve assets account

Current Account:

Current Account Visible items Invisible items Visible items : All transactions related to trade in goods- exports & imports of goods Invisible items : all other items- payment & receipt for services, such as banking, insurance, travel & transportation, & shipping etc Transfer payments is at times another category- relate to gifts, foreign aid, pensions, private remittances, donations received from foreign individuals & governments to foreigners

Current Account:

Current Account Merchandise exports & imports are most important Exports shown as positive item & calculated free on board(fob) meaning costs of transportation, insurance etc are excluded Imports are shown as negative item & are calculated c.i.f meaning costs, insurance & freight are included The net balance on visible items i.e. excess of merchandise exports over merchandise imports called balance of trade which can be favorable or unfavorable

Current Account:

Current Account Balance of exports & imports of services & transfer payments is called balance of invisible trade Invisible plus visible determine the actual current account position Exports of goods & services exceeds imports of goods & services the balance of payments is favorable & opposite case it is unfavorable Current account : exports of goods & services & receipts of transfer payments entered as credits as they represent receipts from foreigners Imports of goods & services & grant of transfer payments to foreigners as debits as the represent payments to foreigners Net value of these visible & invisible trade balances is balance on current account

Capital Account:

Capital Account It shows international flow of loans & investments Short term capital movements Long term capital movements Changes in gold & exchange reserves Short term capital movements: Purchase of short term securities- treasury bills, commercial bills etc Speculative purchase of foreign currency Cash balances held by foreigners Net balances(positive or negative) in current account

Capital Account:

Capital Account Long term capital transactions: Direct investments in shares, bonds & in real estate & physical assets- plants, buildings, equipments etc International capital movements with maturity of one year or more, portfolio investment like purchase of foreign bonds & stocks & international loans Short term international capital transactions -for a period from 3 mths to less than a yr

Capital Account:

Capital Account Two types of transactions in capital account: Private & Government Private include all types of investment :direct, portfolio & short term Government include loans to & from official agencies

Capital Account:

Capital Account Borrowings from foreign countries & direct investment by foreign countries represent capital inflows They are positive items or credits as they are receipts from foreigners Lending to foreign countries & direct investments in foreign countries represent capital outflows They are negative items or debits as they are payments to foreigners The net value of balances of short term & long term direct & portfolio investments is balance on capital account Basic balance : the sum of current account & capital account is basic balance

The Official Settlements Account:

The Official Settlements Account Also called Official Reserve Account is in fact a part of the capital account In US & UK it is shown as a separate account The official reserve assets of a country include its gold stock, holdings of its convertible foreign currencies & SDRs & its net position in the IMF

Errors & Omissions:

Errors & Omissions This is a balancing item so that total credits & debits of the three accounts must equal in accordance with principle of double entry book keeping so that balance of payments always balances in the accounting sense

Disequilibrium in BOP:

Disequilibrium in BOP Total receipts during the reference period need not always necessarily be equal to the total payment obligations of that period When it does not match there is disequilibrium Deficit or surplus in BOP