Articles related with Micro Economics, Macro economics Accountancy and Business studies useful for XI, XII, CS foundation, CA(CPT), BBA ,, and for other readers.


Wednesday, 17 October 2018

Balance of Payment

What is Balance of Payment account ?

Balance of payment is an account in which all transactions of resident of a country with the rest of world are recorded during a given period of time i.e in an accounting year. 

wanna watch video about balance of payment? CLICK HERE

Who can be residents

The residents of the country may include

Private Institutions

What may be the transactions?

Export and import of Goods. This is also known as visible trade because goods are tangible. We can see these goods when these are crossing the borders.

Export and import of Services. This is known as invisible trade because services are intangible. Services are further classified into factor and non-factor service.

Balance of payment account

What are factor services?

Factor services are related with factor of production. We know very well that there are four factor of production.

Land, Labour, Capital and Entrepreneurship

When we provide or receive service of factor of production, it is known as factor service.

What are non-factor service?

Services which are not related with factor of production are known as non-factor services e.g insurance, transport, Banking etc.

Current transfers are also recorded in balance of payment account. Net balance is recorded. In other words , receipt are recorded on credit side and payment are recorded on debit side.

Sale and purchase of securities, borrowing and lending money, purchase and sale of real assets e.g plant, machinery, land are also recorded in balance of payment account. These transactions are known as CAPITAL TRANSACTIONS. Further there are important components of Capital account. These are:-

Borrowing ( ECB & EA)
Foreign investment ( FDI & FII)
NRI deposits
Bank Capital
Short term trade credit

An important account that shows from accounting Language
Balance of Payment

There are two parts of Balance of Payment account

Current Account and Capital Account

Current Account includes export and import of goods ( trade balance), export and import of services ( Invisible balance) and Current transfers balance.

Capital account includes capital transactions as stated above.

When we combine current account balance and Capital account balance, we get overall balance of payment. Click on the link below for example.

difference between capital account and current account

What is trade deficit?

When import of goods is greater than export of goods , we get trade deficit. It is said that balance of trade is unfavourable. When imports are lesser than it is said that balance of trade is favourable.

Don't get confused that balance of trade and balance of payment is same. Balance of trade or trade balance is a component of Balance of Payment account only. Balance of payment account is an overall balance of visible trade ( trade balance), invisible trade , current transfers balance and Capital accounts balance.

Do you know that what is shown by Balance of Payment account?

Balance of payment account shows the status of foreign currency reserves held by central Bank ( RBI in India).  It shows increase or decrease in the foreign currency reserves.

India has surplus in Invisible ( export and import of services ) account.

In the colonial period, India used to have deficit in Invisible account because payments were greater than receipts. British officers were paid on account of their services given in India for British development. Salaries, pensions, gratuities, shipping charges etc were paid. But now India renders more services to the foreigners than they render to india and also official grants sent to India.

But overall balance of Current account of India is negative in recent years and to finance this deficit India is taking loans from private investors or foreign governments.

As stated above , again when we sum up the current account and capital account balance , we get overall balance of payment account. If there is negative balance and if a country is not able to find sufficient capital inflow to neutralise the effect of a deficit on the current account, it will have to draw upon its reserves of foreign exchange. ERRORS and OMISSIONS are always accounted on estimation basis to get overall balance of payment . Finally

Current Balance + Capital Balance + Errors and OMISSIONS = Balance of Payment Account.

If on the other hand current account surplus is greater than the capital outflow from a country, its foreign exchange reserves will increase.

Currently India has to draw upon its reserves due to deficit.

BOP Equilibrium

BOP Equilibrium means ZERO balance after sum up Current account balance, Capital account balance and ERRORS and OMISSIONS. It means there is no movement in foreign currency reserves of a country.

BOP Disequilibrium

When there is either positive or negative balance in BOP account, it is called BOP Disequilibrium.

Autonomous items and Accommodating items

accomodating items and autonomous items

BOP account is also classified in Autonomous items and Accommodating items.

Autonomous transactions are done from the point of view of earning profit. On the other hand Accommodating items are those items which are not transacted for earning profit. These are used for balancing BOP account.

Causes of Disequilibrium in BOP

Again, if there is Disequilibrium in BOP, it means it may be either surplus or deficit. Surplus in BOP is good but deficit in BOP creates problems. Here reasons of deficit in BOP are discussed below.

Economic Factors for BOP deficit

1.Developing countries depend on developed countries for imports. So Import Increases.

2. Inflation makes domestic goods expensive in relation to foreign goods hence high inflation increase imports.

3. Due to high level of competition , demand for foreign goods increases due to factors such as quality , technology etc. Hence it results in fall of demand for domestic goods.

Social Factors for BOP deficit

Change in taste and preferences sometimes favours negatively for domestic goods so demand for domestic goods decreases.

People want to live a standard Life. There are people who copy the living standard of developed countries. Consequently import rises.

Political Factors for BOP deficit

If government is not concerned for creating good environment for investment then foreign investment will decrease. Hence capital inflow reduces

Our Message

We always endeavour to write for you the best. Subscribe us if you liked our Article.

No comments:

Post a Comment

We welcome your valuable comment.