Balance of Trade and Balance of Payments

Balance of Payments

1. A Balance of Payment Account is a systematic record of all economic transactions between residents of a country and the rest of the world carried out in a specific period of time. Meaning of Balance of Payment Account:

2. It is a systematic record of all economic transactions between one country and the rest of the world. It includes all transactions, visible as well as invisible. It relates to a period of time. Generally, it is an annual statement. It adopts a double-entry book-keeping system. It has two sides: credit side and debit side. Receipts are recorded on the credit side and payments on the debit side. Features of Balance of Payment Account:

3. Current Account Balance Capital Account Balance and other minor components like errors and Omissions and changes in Foreign Exchange Reserves Current Account Transactions Merchandise Transportation, Insurance, Miscellaneous Incomes Transfers Components of Balance of Payment Account:

4. Under Capital Account, capital inflows can be classified by instrument (debt or equity) and maturity (short or long-term). Capital Account Foreign Investments Loans Banking Capital FDI, FIIs, ADRs/GDRs Commercial borrowing, trade credit NRI Deposits Capital Account:

5. Disequilibrium Debit exceeds Credit or Credit exceeds Debit causing an imbalance in the BOP a/c Deficit: Our Receipts from foreigners fall below our payment to foreigners. (Unfavourable) Surplus: Receipts exceeds its Payment (Favourable)

6. Causes Economic Factors Imbalance between export & Import New Source of supply & new substitutes High Domestic Price Political Factors Instability & Disturbance cause large capital outflow. Social Factors Population Growth Change in fashion

7. Monetary measures Non – monetary measures I. Monetary measures. Deflation Devaluation of currency Exchange control Increase in Direct and Indirect Tax II. Non Monetary measures 1.Export promotion 2. Import substitution 3.Quota STEPS TO CORRECT BOP DEFICIT

8. The difference between a country's imports and its exports . Balance of trade is the largest component of a country's balance of payments. The items which include imports, foreign aid, domestic spending abroad and domestic investments abroad comes under imports The items which include exports, foreign spending in the domestic economy and foreign investments in the domestic economy comes under exports When exports are greater than imports than the BOT is favorable and if imports are greater than exports then it is unfavorable. Favourable balance of trade indicates the good economic condition of the country. Balance of Trade

9. Cost of Production Cost and Availability of Raw materials Exchange Rate movements Non-Tariff barriers such as environmental, health or safety standards. Factors Influencing Balance of Trade:

10. BASIS OF COMPARISON BALANCE OF TRADE BALANCE OF PAYMENT Meaning Balance of Trade is a statement that captures the country's export and import of goods with the remaining world. Balance of Payment is a statement that keeps track of all economic transactions done by the country with the remaining world. Records Transactions related to goods only. Transactions related to both goods and services are recorded. Capital Transfers Are not included in the Balance of Trade. Are included in Balance of Payment. Which is better? It gives a partial view of the country's economic status. It gives a clear view of the economic position of the country. Result It can be Favorable, Unfavorable or balanced. Both the receipts and payment sides tallies. Component It is a component of Current Account of Balance of Payment. Current Account and Capital Account.

11. Trends in India’s Balance of Payments Stage –I Heavy Imports during plans BoP rose Stage- II A Stage of Comfort 1976-77 to 1979-80 High remittances, good crops, rise in domestic production of oil, more tourist income Stage-III 1980-81 to 1989-90 Period of severe BoP problems oil shock, remittances declined, foreign aid reduced, Inflation Fiscal deficit grew, Political instsbility increased. Stage- IV 1991-92 to 2001-02 period of Foreign Exchange crises Import of capital goods, Increase in prices of crude oil Stage- V 2002-03 2002-03 till date widening Trade Deficit.

12. Management of India’s Balance of Payments Import Reduction Export Promotion Increase export s in services Increasing Efficiency Encourage tourist traffic FDI Effective implementation of FEMA 2000 ***